Merkel’s hard line a ‘watershed moment’
Germany pours cold water on Macron’s eurozone reforms, risking instability when the next global downturn hits
Germany has swept aside France’s grand plan for eurozone reform, refusing to concede any substantive step towards fiscal union or a federal EU crisis machinery to cope with the next global recession.
The minimalist proposals offered by chancellor Angela Merkel after months of silence reflect longstanding German objections to a shared budget and retreat from concessions briefly floated last year. “Solidarity among euro partners should never lead to a debt union,” she said.
Her carefully crafted interview in the Frankfurter Allgemeine is a watershed moment in the history of EU integration.
It guarantees monetary union will remain deformed and dangerously unstable when the next global downturn arrives.
“Sovereignty rules,” said David Marsh, head of the Official Monetary and Financial Institutions Forum.
“She has made it absolutely clear that the German Parliament must have the last word whenever it comes to spending the money of German taxpayers. This is the crucial point.”
There had been a flurry of excitement late last year when Merkel’s Christian Democrats (CDU) agreed a coalition text with the Social Democrats (SPD) suggesting that Euro-MPs rather than the Bundestag might have control over bailout operations.
It would have been a constitutional shift of the first order.
The idea faded as the arch-EU federalist Martin Schulz lost control over the SPD. It is now dead.
While Merkel has agreed to a European Monetary Fund (EMF), it is to be an “intergovernmental” body outside the EU treaty structure.
This preserves Germany’s veto.
Any rescue package requires the assent of the Bundestag with strict conditions, typically austerity and what Berlin deems to be “reforms”.
The EMF essentially replicates the existing system, but with a new element that frightens Paris, Rome and Madrid.
Merkel wants to enforce private sector haircuts and sovereign debt restructuring before any rescue.
Former Italian finance minister Pier Carlo Padoan said such a plan would set off a self-fulfilling financial crisis. “The markets will discount the outcome immediately,” he said.
Marsh said the election of a rebel Government in Italy had made it easier for Berlin to justify what it wanted to do any way.
“It gave them the excuse they were dreaming of,” he said.
Guillaume Menuet from Citigroup says the plan falls “considerably short of what we judge to be necessary to deliver genuine stability when the next potential adverse shock arises”.
It is the “bare minimum” needed to cover up the yawning chasm between Paris and Berlin.
Adam Tooze, director of the European Institute at Columbia University, said the German riposte to French president Emmanuel Macron was depressingly empty. “She is turning a deaf ear,” he said.
Macron has bet his political fortunes on a “grand bargain”, hoping that a burst of reform by France will mollify Berlin and secure assent for a eurozone treasury to back up the orphan euro.
Merkel is more open to his ideas for European defence, yet talk of an EU “intervention force” smacks of institutional furniture shuffling.
The reality is that EU security remains anchored in Nato, which will provide 80 per cent of the alliance’s military capability after Brexit. French and German foreign policy are not aligned in any case. The urgent issue is the euro. Macron concluded during the debt crisis that the EMU policy regime rested on the central fallacy that all members of a currency block could deflate their way to competitiveness. This leads to contractionary bias, trapping vulnerable nations in a bad equilibrium until they rebel.
Merkel has given the nod for an EMU investment fund but this would be phased in slowly and would be limited to the “low two-digit billions”. A cap of €30b ($49b) has been mooted in the German press. This would be 0.2 per cent of eurozone GDP, a token compared to the 6 per cent to 7 per cent target first floated by Macron.
There is little prospect of a pan-EU backstop for banks. The “doom loop” lives on, tying together the fates of sovereign states and national banking systems.
Merkel opened the door to fiveyear credit lines, modelled on the facilities of the International Monetary Fund for well-behaved states. “We would be able to take under our wing countries that get into difficulties because of extraordinary circumstances,” she said, citing the case of Brexit fallout for Ireland. Yet these would be loans. The proposal has nothing in common with the automatic stabilisers and fiscal transfers that shift money to distressed regions in full-fledged monetary unions — the US, Canada, India or Brazil — when hit by an asymmetric shock.
The hard line from Berlin is no surprise. Chancellor Merkel’s hands are tied by the German constitutional court. It has ruled that the Bundestag may not surrender its budgetary powers over tax and spending to any supranational body, for to do so would be to eviscerate German democracy. Nor may the Government enter into unlimited debt commitments beyond its control. Any fiscal union would require a change in the German Grundgesetz.
The anti-euro AfD party is chipping away at the traditional base of both the SPD and the CDU, especially its Bavarian social Christian wing. The AfD is now the official opposition in the Bundestag and controls the budget committee.
A group of 154 German economists signed a joint letter in late May warning that the country was being led by the nose into a eurozone debt union. They warned that the Macron plan was not only ruinous but also posed a threat to the integrity of Germany democracy. Merkel has heard the message. Fiskalunion will remain what it has always meant in German: EU control and surveillance over spending, banking systems and debt resolution; and enforcement of the Fiscal Compact by EU commissars. It is what critics call a “disciplinary union”. It is a far cry from Macron’s Carolingian dream.