Merkel, Macron and the euro

Opinion piece (Politico)
John Springford, Pepijn Bergsen, Guntram B. Wolff
07 June 2018

In an email forum, three experts chime in on the German chancellor’s proposal for the eurozone.

German Chancellor Angela Merkel last weekend showed her hand on eurozone reform, and the EU policy world has been digesting her intervention ever since.

In the interview, the chancellor appeared to reveal a gap in ambition between Berlin and Paris, raising questions about the chances of a eurozone overhaul.

POLITICO asked three top experts what to make of it all: Guntram B. Wolff, director of Bruegel, the economics think tank in Brussels; John Springford, deputy director at the London-based Centre for European Reform; and Pepijn Bergsen, the Economist Intelligence Unit’s economic policy analyst. What follows is an edited version of their email exchange.

Has Merkel shut the door on eurozone reform?

Wolff: Merkel is pretty realistic on what is a feasible compromise today … I judge her proposals to be insufficient for a well-functioning euro area. I missed a remark on the need for Germany to adjust its economic policies to help rebalance the euro area. I missed a discussion on the area-wide fiscal stance of the euro area and the reform of the fiscal rules, and I’d say the positive statement on banking union and capital markets union is only significant if followed by the introduction of deposit insurance and concrete action on capital markets.

Is this the best we could expect from her?

Springford: I agree that Merkel’s suggestions were disappointing on the eurozone. The core of the euro question is about how automatic the bloc’s collective response is to crises that hit some countries particularly badly. In an ideal world, markets would have certainty that if a country’s banking system or government got into financial trouble, there would be swift collective action to restructure, recapitalize and provide lending and other forms of liquidity. But Merkel suggests she views a European Monetary Fund that would only provide emergency lending with strict conditionality and national oversight for lending, and no mention of risk-sharing – such as common deposit insurance for the banking system – that would happen automatically.

Should we have expected anything different from Merkel?

Bergsen: I agree with both of you that Merkel’s proposals did not go far enough to speak of a complete and sufficient reform effort. However, I think she does not get enough credit for what she has seemingly managed to get agreement for within Germany. While some of the traditional northern conditions are still there (debt restructuring, fiscal monitoring to guarantee discipline), the opening up to creating something of a eurozone investment budget is thus a significant and welcome change in position.

The Commission’s proposed investment budget is €25 billion. Merkel described her investment budget “in the low two-digits billions.” Are you overblowing the significance of Merkel’s change in position?

Bergsen: The change in position is relevant because so far even such a small step looked politically impossible, not just for Germany but across much of the “core countries” and the eastern member states … A budget “in the low two-digits billions” is certainly not [French President Emmanuel] Macron’s preferred level of pooled resources, but the deliberate ambiguity in many of Merkel’s statements suggest there is a possibility to do more in other areas.

Should we be celebrating Berlin’s small step in compromise?

Wolff: Germany’s position on debt restructuring seems to have softened. She actually does not mention it explicitly and only has a half sentence that can be interpreted in that direction … Second, I am actually positive on the structural reform fund. The Commission proposes €25 billion in the EU budget for reforms, in cash, not credit. While this will not be the ultimate driver of reform, it will still be immensely helpful for countries that do major reforms. For example, I could imagine that the new Italian government wanted to introduce e-government to reduce corruption. Wouldn’t it be great if the EU could support this with a few billion?

Merkel seems to suggest that a European Monetary Fund should have more power when it comes to growth forecasting, debt sustainability analysis, and the ability to issue short-term loans.

Springford: We shall see if the new EMF will be much bigger than the pre-existing European Stability Mechanism. As for short-term credit lines, I’m speculating, but this might be for lending to help countries with bank clean-ups (as happened in Spain in 2012 and 2013). Insofar as that means Germany is unwilling to fully federalize the banking system, it’s bad news because banks and governments will still be closely linked.

Could you each outline what the most realistic outcome of the June euro summit will be.

Bergsen: I would expect at most a broad outline for the direction of reform to come out of the June summit. A significant sticking point will be sovereign debt restructuring. The northern and eastern member states are clearly very keen to include this, but the southern member states are almost equally keen to keep this out … Merkel is clearly more keen to make progress on other issues, especially on defense and border control (on which it should be easier to find consensus), than to prioritize the euro.

Wolff: It’s difficult to predict European Council conclusions, but I’d say it will be rather close to Merkel’s interview — and that is actually not bad news but overall, a pretty strong commitment to the European project and delivering on the big issues of concern to citizens such as migration. Eurozone reform will remain a painfully slow and gradual process given the deep lack of trust between everybody involved.

Springford: My guess is that little can be done to make a big step forward, given what’s happened in Italy and Germany, even on the banking union. That does not mean that small reforms are not important — and the investment budget is a helpful move. However, it does mean that the only big macroeconomic integration that we’ve had since 2010 is the shift in the European Central Bank’s policy … that it has committed to being lender of last resort. We had better hope that the next downturn is a long time coming, so that interest rates have been normalized and the banking sector is in better shape.