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November 09, 2018

What to make of Merz’ pro-Europeanism

Reuters picked up on a comment by Friedrich Merz, who said that Germany was benefitting from the monetary union through real exchange rate depreciation. Speaking at a Chatham House conference in Berlin, he said:

“We have to do more than we are actually doing because if Europe fails - and this is a clear option, no one can deny it, Europe is really at the threshold at the moment - if Europe fails, the Germans will be those who suffer most from that."

It is extremely rare to hear a German politician talk in those terms. Martin Schulz tried a similar approach from the left, but the SPD never showed much genuine interest. And we all know how the Schulz story ended. 

The big question for the CDU is whether it will allow Merz to shape an agenda that is distinctly out of line with the party’s mainstream. We think it is quite misleading to characterise the debate in the CDU on the classic left-right spectrum. Annegret Kramp-Karrenbauer is socially more liberal than Merz but, like most German politicians, disinterested in European affairs. Like Merkel and unlike Merz, she is unlikely to invest political capital into further European integration.

What we do not yet know from Merz are the details. We know that he supports the idea of a eurozone unemployment reinsurance system. On this point, it is worth reading Isabel Schnabel’s minority opinion in the annual report by the German council of economic experts, in which she gives a rigorous economic defence of such a system. The German debate on this issue is not as black and white as it seems from the outside. The CDU has rejected the whole idea, while the SPD supports a rather limited version.

But, more importantly, will Merz back a European safe asset? We doubt that very much. In Germany this has been a taboo subject - one that even Emmanuel Macron did not dare propose. We presume that Merz would push for a limited number of reforms with high visibility and a good chance of securing majorities - such as a small fiscal capacity with a European finance minister and an unemployment insurance system, and perhaps also the European deposit insurance scheme. 

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