June 05, 2018
Merkel sets the terms. What response from Macron?
Much of the French and German press was preoccupied with analysing what Angela Merkel meant when she made her proposals on the eurozone. The consensus is similar to ours - there is not much change from what we knew already. What we do sense, however, is that some of the commentators underestimate the difficulty to getting any of this agreed at EU level. Do we really think that the new Italian government will accept a rule change to allow the ESM/EMF to force a national debt restructuring?
Werner Mussler has done a good job of dissecting the entire proposal in his analysis for FAZ. For starters, he noted that Merkel did not mention deposit insurance, a eurozone budget or a eurozone finance minister. Instead she is proposing three new sources of funding. On the first one - the five-year credit line - he notes is an important distinction. At present, a programme can only be triggered if the eurozone as a whole is in trouble. Merkel's short-term programme would not be subject to the same constraint. The idea is to allow the ESM to help countries that suffered either an asymmetric shock or some form of domestic economic or financial crisis.
The second pot of money are the fund for innovation, which Mussler sees administered by the ESM - not by the European Commission. Merkel mentioned a total volume in the low double-digit billions, but as so often when German politicians and newspapers report on numbers they don't always tell us whether these are total stocks or annual disbursements. The third pot is a separate fund to incentivise countries to conduct structural reforms.
The ESM will not only change its name and administer another credit line but, as Mussler asserts, Merkel wants the new EMF to act as the quasi-intergovernmental finance ministry of the eurozone, with much stronger economic expertise than at present, and with co-responsibility for supervision of fiscal policies in all member states, not just crisis countries. It is not hard to see how this proposal could end up generating an inter-institutional war between Brussels and Luxembourg.
What is the French response to Merkel? The Élysée palace may have welcomed Merkel's 'encouraging' step towards the French position, but the echo in the press is muted, also due to a lack of enthusiasm for the eurozone in general. Everyone agrees that Merkel's response is far below Macron ambitious reform proposals for the eurozone. And that the conditions Germany imposes are likely to displease some countries in the eurozone, France included.
Will Macron be satisfied with such a slimmed-down agenda? Macron may well wish that he hadn't bothered, as Politico put it. It may have showed how politically naïve Macron was. After all, Merkel always prefered prudence. But prudence is no longer up to the challenge, warns Le Monde's editorial. Has Macron any other choice than to agree to Merkel's terms, and risk being out of sync with both the historic challenges and his personal ambitions?
A more positive reading is the assessment of the paper's Berlin correspondent, but the article focuses on the areas where there has been more convergence with the French position: defence, immigration and European institutions. Merkel's proposal of a European intervention force is probably her most ambitious goal, also given Germany's poor spending targets, but it is considered in Paris as an important political signal. On immigration, Merkel conceded that the quota system for refugees failed and advocates a more flexible system with shared responsibilities, a European agency for migration and the harmonisation of asylum rights.
Merkel is ready to cut down the Commission with a Commissioner rota for the large countries, and she is proposing that the leaders of the political parties in the European Parliament should come from transnational lists.
Nikolas Busse in FAZ interprets the relatively positive reaction in Paris as a white flag of realism - one can’t really expect from Berlin more than this. We agree with the overall conclusion of Nicolas Veron, who noted that France and Germany were
"still barely at the starting-point phase. It may well be that the 2018 window of opportunity for eurozone reform has already closed."
There is no way that the European Council will be able to agree a final package at the June summit. The second part of the year will be dominated by Brexit and the upcoming European elections. Our expectation is a small agreement sometime in the autumn - smaller even than what Merkel proposed. At that point, the majorities in the European Parliament will have changed in such a way that it will become increasingly difficult to agree any reforms.