Ger­many is frus­trat­ing Macron’s grand am­bi­tions

The re­al­ity is that Paris and Ber­lin are no longer nat­u­ral al­lies

Tehran Times - - INTERNATIONAL - By Wolf­gang Mün­chau

The Franco-Ger­man hon­ey­moon has ended. At the be­gin­ning of the year, An­gela Merkel, Ger­man chan­cel­lor, and Mar­tin Schulz, the for­mer leader of the So­cial Demo­cratic party, agreed that Ger­many would enter into a mean­ing­ful di­a­logue with Em­manuel Macron, the French pres­i­dent, on re­form of the eu­ro­zone. As it turned out, the eu­ro­zone agenda was a per­sonal project of Schulz’s, not of the SPD. When he was ousted as leader in Fe­bru­ary, the party lost in­ter­est. The grand coali­tion is once again in power, but now with­out the only in­ter­est­ing project that would have jus­ti­fied its ex­is­tence. Olaf Scholz, the SPD fi­nance min­is­ter and the party’s new strong­man, is no­tably cool on the whole idea. On the im­por­tant is­sue of a Euro­pean de­posit in­sur­ance scheme, he is as skep­ti­cal as his pre­de­ces­sor, Wolf­gang Schäu­ble. The op­po­si­tion to eu­ro­zone re­form from in­side Ms Merkel’s party, the CDU, and its Bavar­ian sis­ter party, CSU, is as strong as ever. The CDU/CSU group in the Bun­destag re­jects all but one of the items on Macron’s re­form agenda. They do not want an en­larged Euro­pean Sta­bil­ity Mech­a­nism, the res­cue um­brella, nor a sin­gle eu­ro­zone bud­get.

And like Scholz they do not want a Euro­pean de­posit in­sur­ance scheme un­til the Ital­ian banks have man­aged to get rid of most of the bad loans on their bal­ance sheet. They do not want debt re­lief for Greece, ei­ther.

The only re­form idea for which there is some luke­warm sup­port is that of a fis­cal back­stop to the bank res­o­lu­tion fund, some­thing that should have hap­pened a long time ago. The mes­sage is clear: Ger­many is say­ing no to Macron on eu­ro­zone re­form, at least in sub­stance. There may still be some to­ken deal, per­haps a tiny eu­ro­zone bud­get with no macroe­co­nomic sig­nif­i­cance. To add in­sult to in­jury, Merkel also pre­emp­tively ruled out Ger­man in­volve­ment in mil­i­tary ac­tion against the Syr­ian regime.

I wonder how those two un­re­lated mes­sages from Ger­many will be re­ceived. France is now in ex­actly the po­si­tion Marine Le Pen, leader of the far-right Na­tional Front, has warned about: in a mon­e­tary union in which the voice of France counts for lit­tle and a geopo­lit­i­cal sit­u­a­tion in which the UK is the more re­li­able part­ner. Macron’s en­thu­si­as­tic sup­port for Euro­pean in­te­gra­tion con­trasts with the un­changed po­lit­i­cal re­al­ity that France and Ger­many are no longer nat­u­ral al­lies.

Un­like in France, the pro-Euro­pean par­ties in Ger­many are in re­treat. Merkel’s party lost 1m votes to the Free Democrats and the Al­ter­na­tive for Ger­many, both of which ad­vo­cate poli­cies that would lead to the de­struc­tion of the eu­ro­zone. Sixty CDU/CSU MPs voted against the Greek sup­port pro­gram in 2015. If faced with a sim­i­lar re­bel­lion to­day, the grand coali­tion would no longer have a ma­jor­ity. Does this make eu­ro­zone re­form im­pos­si­ble?

I do not think so. The June dead­line for eu­ro­zone re­forms was cho­sen be­cause Macron needs some­thing con­crete to show be­fore the Euro­pean elec­tions in May 2019. As a long­stand­ing ad­vo­cate of eu­ro­zone re­form, I am find­ing my­self in the un­usual po­si­tion of fa­vor­ing a tac­ti­cal re­treat.

It would be bet­ter to wait for a bet­ter mo­ment to push the two is­sues that re­ally mat­ter, nei­ther of which is on the agenda right now: the cre­ation of a sin­gle safe as­set, or a eu­ro­zone bond; and the le­gal and po­lit­i­cal sep­a­ra­tion of na­tional gov­ern­ments and their banks. Re­form­ers should ex­ploit the fact that the large and per­sis­tent cur­rent ac­count sur­pluses of the north­ern eu­ro­zone coun­tries make them vul­ner­a­ble to a sud­den dis­rup­tion of trade flows.

Only an ex­is­ten­tial cri­sis that threat­ens the very sur­vival of the eu­ro­zone has the po­ten­tial to con­cen­trate minds in the north­ern eu­ro­zone. A very large cur­rent ac­count sur­plus makes you strong in good times, but weak in bad. Now is not the mo­ment to ex­tract con­ces­sions from Ger­many or the Nether­lands. The al­ter­na­tive is wast­ing scarce po­lit­i­cal cap­i­tal on weak re­forms.

We would also have to ac­cept con­di­tions that might add to fi­nan­cial in­sta­bil­ity, like Ger­many’s de­mand for a semi-au­to­matic debt re­struc­tur­ing or caps on bank hold­ings of sovereign bonds. If the al­ter­na­tive is a big leap in the wrong di­rec­tion, stand­ing still would con­sti­tute rel­a­tive progress.

To add in­sult to in­jury, Merkel also pre­emp­tively ruled out Ger­man in­volve­ment in mil­i­tary ac­tion against the Syr­ian regime.

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