Macron Vs. the Germans?

French president Emmanuel Macron travelled to Berlin for serious negotiations about the future shape of Europe. Will he achieve much?

Almost everybody would like to support him, partly to strengthen his hand against his anti-European adversaries at home. But hardly anybody in Berlin seems ready to breach “red lines“ drawn in the past.

Macron probably knows by now that he will have to settle for some modest changes for the time being, with only baby steps to be agreed by the time of the next EU summit on June 28-29, 2018.

Money isn’t the key issue. Germany is ready to spend more and put more of it at risk. But it would come with three key strings attached.

1. Berlin will insist that commitments involving serious amounts of money will remain subject to approval by the German parliament, as is currently the case for support programs of the European Stability Mechanism (ESM). For those who love unwieldy German words, get used to “Parlamentsvorbehalt.“

2. Upon gradually completing the banking union, Germany will insist that each step to share risks comes after a step to reduce risks.

3. Partly because the Eurozone economy is doing fine at the moment and Germany is reluctant to endorse a major change in the governance of the Eurozone, Germany puts significant emphasis on changes for the EU rather than just the Eurozone level. For instance, this means improving controls of external borders (including significantly increasing the funding for FRONTEX), controlling migration and beefing up joint defense projects.

What is possible – and what is not?

Fiscal union?

Forget about a genuine big Eurozone budget worth its name controlled by a Eurozone finance minister who answers solely to a Eurozone committee of the European Parliament.

That would go well beyond what Berlin may concede, or what Germany’s constitutional court would allow short of a major change in the German constitution.

Any “fiscal capacity” controlled largely by the European Commission would remain small. Instead of strengthening the role of the European Commission very much, Germany is mulling the idea of creating a new council of economics and finance ministers to shift the emphasis more strongly on issues of competitiveness beyond the policing of fiscal rules.

European Monetary Fund (EMF)?

Berlin would like to turn the ESM into a fully-fledged EMF — so that neither the International Monetary Fund (IMF) nor the European Central Bank (ECB) would need to be involved in the design and supervision of future support programs for struggling Eurozone member states.

But Berlin will understandably also see to it that the EMF maintains the ESM’s intergovernmental governance structure. This gives big member states (with 15% or more of the weighted votes) — and hence the German parliament (as well as France, Italy and Spain) — a veto.

Shock absorber?

Berlin might hesitantly accept the idea of a new facility to offer conditional credits to member states that are hit by an asymmetric shock. This mechanism would come into play even if the shock does not seem to pose the kind of systemic risk that would get the current ESM involved.

But such a new facility would either have to be part of the ESM/EMF or be subject to a similar governance structure. A pot of money to reward countries for independently verified reform progress would be more to Germany’s liking than a big “fiscal capacity” controlled by the European Commission.

Banking union?

Ahead of the June 2018 EU summit, where Germany and France would like to discuss joint reform proposals and possibly take some first decisions, Berlin is emphasizing small practical moves towards banking union.

With suitable safeguards, the ESM/EMF could become the ultimate backstop for national bank resolution funds.

Berlin may also agree to small steps towards a joint deposit insurance such as a roadmap that shows in a step-by-step fashion which reduction of risks would need to come before a certain step towards sharing risks can be taken.

Falling short of what is needed?

The modest changes Berlin may be ready to endorse over time will likely fall far short of what some observers deem necessary.

On that count, I disagree. With the ECB‘s “whatever it takes“ OMT program, the Eurozone has filled the one crucial gap in the institutional architecture of the Eurozone long ago, the lack of a lender of last resort.

Completing the banking and capital markets union as well as steps to streamline decision-making and fiscal facility to smoothen the cycle or cushion weaker members are highly desirable. But unlike the OMT program, they are not essential.

In the end, it is important to note that the economic future of Europe will be decided in Paris much more than in Brussels or Berlin. It is actually a matter of French choice.

If Macron succeeds in transforming the French economy like Margaret Thatcher did in the 1980s or like the “Agenda 2010“ reforms in Germany around 2004, the Eurozone and the EU will benefit mightily.

If a reformed, much more dynamic France joins a still reasonably strong Germany, core Europe will be a much more attractive place for other countries to join or stay close to.

Compared to that fundamental effect, i.e., the direct benefits which France‘s neighbors would derive from having a strong rather than struggling big partner to trade with, the details of, say, banking union or the governance structure of an EMF will play only a minor role.