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Will Emmanuel Macron Succeed in Reforming the Eurozone?

ARTICLES - 22 December 2017

By Institut Montaigne

Three questions to Morgan Guérin, specialist of European affairs at Institut Montaigne.

What are the consequences of Angela Merkel’s inability to form a government for Emmanuel Macron’s European policy?

Emmanuel Macron’s plan was simple: wait for Angela Merkel’s reelection and then launch a radical reform of the European Union (EU). From a French perspective, the project was essentially meant to reinforce the eurozone and implement the embryo of a European budgetary capacity, in order to organise financial transfers between the zone’s different economies. During the German electoral campaign, the Social Democratic Party of Germany (SPD), led by Martin Schulz, former president of the European Parliament, seemed to respond positively to the project proposed by Emmanuel Macron. In contrast, the Free Democratic Party (FDP), led by Christian Linder, was firmly opposed to a transfer union within the eurozone.

The election’s results could only disappoint the French President. Just as the polls predicted, the alliance led by Angela Merkel between the Christian Democratic Union of Germany (CDU) and the Christian Social Union in Bavaria arrived top of the list with 32.93% of the votes. The SPD scored 20.51%, followed by the eurosceptic party Alternative for Germany (AfD), which will make its first entry in the Bundestag. The FDP gathered 10.75% of the votes, followed by the radical left party Die Linke (9.24%) and by Alliance 90/The Greens (8.94%). 

As soon as the results were released, Martin Schulz publicly announced he did not wish for the SPD to take part in a new governmental coalition with the CDU/CSU. In order to remain head of the German government, Angela Merkel’s only option was to engage negotiations with the FDP and the Greens. Such an alliance, called “Jamaïca” in reference to the colours of the country’s flag, had never yet occurred at a federal level. The FDP’s entry in government was undoubtedly a hard blow on the Elysée’s plans, as the party is firmly opposed to Emmanuel Macron’s wish to reform the eurozone. As a consequence, the French President probably amended his initial version of the speech he delivered at the Sorbonne University, two days only after the election. Indeed, the eurozone and its issues only represented a minor section of his speech, and his proposals - willingly? - lacked precision. 

If the SPD refused to enter government, it is most probably because it thought that after eight years in a great coalition government, its electoral results would be even weaker than they are today. Martin Schulz aimed to repolish the party’s image by embodying the opposition once again. However, the failure of the negotiations for a “Jamaïca” coalition is a game-changer. In the absence of a government, Germany’s federal president Frank-Walter Steinmeier could call for new general elections, which would probably take place in February, March or April of next year. The SPD’s results could then be even more disappointing, as the voters would have no interest in voting for a party that has no will to govern. This explains why the SPD has now decided to open negotiations for a new coalition with the CDU/CSU.

Should we take this as a sign of hope for Emmanuel Macron’s European project? The fact that the SPD is now in favour of the eurozone is indeed positive. However, the President is now confronted with a timing issue: we will have to wait a few months before the negotiations’ outcome. But time is running out. The next European elections will take place in May 2019 and European institutions will probably take a step back six months prior to the elections in order not to interfere in the campaign. If the reform put forward by Emmanuel Macron is not acted upon before, the subject will undoubtedly become a central issue of the electoral debate. This could encourage some of the political movements, which have the potential of looking favorably upon this reform, to distance themselves from it in order to avoid frightening their electorate. We could in particular imagine that the CDU/CSU would be tempted by such a strategy. Will Emmanuel Macron then have the time to convince Germany and his European partners to follow him?

Why is the eurozone reform such a divisive issue between Member States?

The single currency was conceived as an instrument serving the economic convergence of the European countries that will adopt it. In fact, the reverse situation occurred. The unemployment rates, trade balance and public finances of many Member States have greatly diverged over the past years. The comparison between France and Germany is striking. In 2016, the French public deficit amounted to 3.4% of the GDP, whereas Germany’s surplus reached 0.8%. The French trade deficit amounted to 48.1 billion euros, when Germany achieved a record trade surplus of 252.9 billion euros. Finally, France’s unemployment rate reached 9.7% of the active population, against 5.6% in Germany.

European political leaders have not forgotten about the financial crisis and the subsequent sovereign debt crises. Thanks to the national governments and the ECB’s determined actions, the single currency institution was preserved and no country chose to return to its national currency. Nevertheless, the euro’s weakness is a shared concern for European capitals, and no government wants to risk a hasty deconstruction of the single currency were a new crisis to occur. 

The disagreement between the states mainly concerns the solutions to strengthen institutions. Both France and Germany created the single currency and, regarding many issues, their vision of the euro’s future and its optimal functioning has not budged since. According to France, the euro implies the implementation of an economic governance and requires some kind of financial solidarity between Member States. According to Germany, the euro has reached its goal to decrease both inflation and public funding. It will continue to work perfectly well if other states engage in responsive budget policies and implement structural reforms leading to higher competitivity in the productive sector. These two visions result from diverging cultural and political traditions, which the last crisis has partly reinforced.

In practice, what should we expect from a reform of the eurozone? 

German political leaders and economists frequently blame France for inventing great institutions and mechanisms without explaining neither their utility nor their functioning. France has been defending the creation of an economic government of the eurozone and a finance minister position for many years. Such recommendations underline France’s ambition to reinforce the eurozone’s political leadership. Germany is rather suspicious of these proposals and, though it does not entirely reject them, it wants France and Southern European states to organize their public finances and carry out structural reforms before engaging discussions over the precise terms of such institutions. 
 
Traditionally, France also defends the creation of a budget or a fiscal capacity for the eurozone, in order to support some states’ public finances, and to have an efficient tool to respond to the zone’s asymmetrical crisis. For Northern states of Europe and especially Germany, introducing such a mechanism would mean nothing more than implementing permanent transfers from North to South and discouraging  states from reforming their economy.
 
This very rich debate, which has involved many think tanks and European institutions for long years, has shed light on an almost unanimous proposal: the transformation of the European Stability Mechanism - created among the various tools designed during the financial crisis, and established in 2012 - into a European Monetary Fund. This monetary fund’s precise tasks still need to be negotiated, but its aim would be to help member states going through a liquidity crisis or those risking to lose access to financial markets. If it receives sufficient financial support, this fund would allow Europe to emancipate from the International Monetary Fund’s (IMF), as it was the case during the Greek crisis. Last August, chancellor Angela Merkel offered her support to this proposal, and saw it as a way to “react well to unexpected situations”. Wolfgang Schaeuble, the influent former finance minister, who is currently Bundestag President, also decided to back this project in April 2017. He nonetheless stressed the “lack of productivity and competitiveness in many countries, as the necessary reforms have not been carried out”.  
 

 

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