Germany and Europe: A New Relationship?

It remains an open question whether or not Germany’s SPD will join chancellor Angela Merkel for a new “grand coalition” in Berlin. It looks likely, but by no means certain ahead of an SPD party convention on January 21, 2018. SPD left-wingers prefer to sharpen their party’s profile in opposition.

But regardless of the SPD decision, the potential coalition deal which leaders of Merkel’s CDU/CSU and the SPD presented after they concluded their exploratory talks marks a significant step for Europe.

After all, the more conservative parts of Merkel’s CDU/CSU, including the Bavarian CSU, have agreed to the deal. This therefore does show how far Germany may – or may not – go to meet the proposals of French president Emmanuel Macron and others to reform Europe.

Remember that on EU/euro issues, it is not the SPD, but the more conservative segment of Merkel’s own CDU/CSU which constrains her room for maneuver.

European integration the top priority

Remarkably, given Germany’s manifold challenges, CDU/CSU and SPD leaders chose to present the pledge to strengthen European integration as their top priority. Europe took up the first three pages of their joint paper mapping out the contemplated new government’s strategy.

As expected, Merkel apparently wants to make progress in Europe one of her signature achievements so that she can secure her place in future history books.

On this point, she is very much supported by SPD leader Martin Schulz, who served as President of the EU Parliament until late 2016. To some extent, the paper can be seen as a first German response to Macron.

Relative to the domestic content of the potential German coalition deal, which seems cautious to mediocre at best (and includes expensive increases of pension entitlements, some small-scale reform reversals), the EU-related content of the package at least seems forward-looking.

In the paper, the would-be “grand coalition” promises to:

• raise investment in Europe
• strengthen the role of the European Parliament and
• increase the German contribution to the EU budget.

While Germany would prefer all members of the EU27 to participate in EU reforms, the paper also emphasizes that Germany and France should develop common positions on all major European and international issues. They should also be ready to proceed in areas in which other EU members may not (yet) be ready to follow.

Concrete measures

As concrete measures, the paper’s proposals include a comprehensive range of measures:

1. the allocation of specific funds within future EU budgets to economic stabilization, social convergence and the promotion of structural reforms in the Eurozone. This could turn into the nucleus for a future investment budget for the Eurozone;
2. the scaling up of the European investment program (EFSI);
3. turning the European Stability Mechanism (ESM) into a European Monetary Fund (EMF);
4. devising an EU framework for national minimum wage laws;
5. combat corporate tax evasion so that profits are taxed where they arise;
6. harmonizing the way in which the basis for corporate taxes is calculated;
7. strengthening security and defense co-operation;
8. passing a substantial financial transactions tax.

Assessing the proposed reforms

A European Monetary Fund is not exactly Macron’s preferred idea. However, Germany will likely get this wish granted.

However, it is by no means clear yet whether or not a new facility to support countries hit by non-systemic asymmetric shocks will be part of the EMF or whether it will fall under the EU budget.

The EU will spend more on investment and provide privileged access to EU funds for countries that pursue pro-growth reforms.

One can also expect the EU – or subgroups of EU members willing to co-operate more closely – to establish new funds to support joint defense and other projects.

While the EU Parliament may get a stronger role and the head of the Eurogroup of finance ministers may possibly even assume the extra title of Eurozone finance minister, one crucial fact remains: Any decision to spend large amounts of new money have to be approved by a qualified majority of member states. This de facto gives the German parliament as well as France and Italy a veto.

Similarly, the hurdle for the EU (or a minimum group of nine EU members) to pass a genuine financial transactions tax remain high.

As countries compete to attract some financial business from post-Brexit London, it may turn out in the end that, fiery political rhetoric notwithstanding, few countries may want to pursue this idea energetically.