July 20, 2017
Where France and Germany disagree
We have previously pointed out that the Macron-Merkel agenda towards eurozone reform is very likely to disappoint. We are not saying that it won’t happen. It probably will. We are saying that it will not address the issues that need to be resolved - just as the banking union failed to address the co-dependence between the financial system and the public sector in several member states.
Politico has done a good job listing the main areas of difference between Angela Merkel and Emmanuel Macron, starting with the observation that there is not a lot of substance behind the show - like the complete lack of details behind Merkel’s support for a joint fighter jet. The article lists five areas of fundamental disagreement between France and Germany that have not disappeared with the election of Macron: Germany’s excessive current account surplus, an issue on which Macron agrees with Trump; Germany’s unwillingness to raise defence spending, another point on which Macron is closer to Trump; continued German scepticism about France’s determination to reform; different visions on the nature of eurozone governance reforms (more on this below); and a battle for Mario Draghi’s succession.
The article also outlines paths to a limited agreement: Merkel might find it easier to sell limited governance reforms at home if she can get Jens Weidmann appointed as Mario Draghi's successor. But we caution against any big swings in the German position on the substance of this issue. Germany is implacably opposed to any form of fiscal transfers. The most we can see is a common budget with only limited debt-raising capacity. The Politico article makes another important point: the eurozone economy is near peak performance right now. In three years' time, when some of those decisions are likely to be taken, we might already be in a phase of a downturn.
It is important to highlight the ideological difference on eurozone reform in particular. Germany has a well-thought-out position on the issue, and the country is not going to budge simply because others say so. This is best summarised by Wolfgang Scháuble in a letter to German MPs, as reported by Reuters:
"The rule for this is simple and convincing: To set the right incentives and avoid non-sustainable developments, risks and liabilities must be at the same level and in one hand."
A more detailed presentation of the position has been worked out by the German Council of Economic Experts, or rather four of its five members (minus Peter Bofinger). We thought the following quote summarises the position nicely. It is telling us that Schäuble’s position is backed by the country’s economic establishment:
"There are abundant reform proposals [on eurozone reform], not least from France. These proposals include, for example, a common fiscal capacity or a common unemployment insurance to mitigate macroeconomic shocks, harmonized taxes or even a single minimum wage. Proposals of this kind have been put forward for years, but they follow a misguided diagnosis of the problems of the eurozone. They are based on the assumption that the problems lies in a lack of solidarity rather than on a lack of responsibility. ...They nurture the illusion that the advanced step of collective action requires the soundness of individual action, whereas our experience is the exact opposite."