The debate about the future of Europe is finally gaining momentum again after lying dormant for some time. In mid-September, EU Commission President Jean-Claude Junker presented his vision of how the EU can become more democratic and more dynamic. A few days ago President Macron of France went considerably further, calling for much deeper cooperation within the Union, and no less than a “relaunch“ of the EU; this makes the “Merkel system” look fairly “outmoded”.
Merkel has rarely led courageously from the front in the past, preferring instead to inch forward very tentatively. And now, after the Bundestag election, her hands are still tied to some extent. She faces complex, and probably lengthy coalition negotiations. There is a wide gulf between the positions of her potential coalition partners.
It is therefore interesting that Macron’s speech was also regarded as a sign that France can now be expected to move more centre-stage again as a leading political force throughout Europe. Europe is in the process of liberating itself from the Merkel system. This is a very surprising development. The Euro crisis has apparently been overcome and the Euro area has moved into a cyclical upturn.
However, Macron’s speech was by no means merely symbolic. It is gratifyingly specific and provides Europe with the first serious basis for discussion on how to prevent the EU from drifting further apart after Brexit. This alone represents progress compared to the proposals of EU Commission President Juncker, which are all too obviously aimed at further expansion of the Brussels power base and the centralism which has been the subject of much criticism. It is correspondingly amusing to see how hard Juncker is now trying to highlight the common features of the two proposals.
In many respects, Macron is pushing at an open door. Neither joint standards on asylum, EU-wide minimum taxation for multinational companies, nor the idea of closer military cooperation are likely to meet with much opposition from pro-Europeans. If France and Germany act together here, it could be difficult for the rest of the EU to oppose the plans, even if the asylum proposals in particular fail to gain unanimous approval from the central European countries of the EU. Securing external borders and the issue of asylum are both key issues which Europe must resolve to avoid jeopardizing the unity of the community. These issues may ultimately have tipped the scales in the Brexit vote.
However, the second major problem area which must be resolved, above all to secure the future of the Eurozone, relates to economic and social conditions. Although all sides agree that greater economic integration is essential, ideas as to “how” this can be achieved differ very widely. Like some other countries in the Euro area, Macron is continuing to focus on the guiding hand of the state. A European finance minister, with his own budget, would thus drive forward European integration and also ultimately symbolise the idea of European solidarity.
Germany’s counterproposal to Macron’s model is the European Monetary Fund, although its mandate is to control rather than steer fiscal events in the Eurozone. High expectations of both countries require agreement to be reached on this question and the two governments are likely to be pragmatic enough to make this happen. The new dynamism is likely to be virtually unstoppable. Not even by the FDP whose election manifesto expressed clear opposition to a policy of greater communitisation in the Euro area.
The Euro area therefore looks set to enter an era of greater burden-sharing. This would enable the groundwork to be laid for the longer-term stability of the Euro area, provided the countries concerned – first and foremost Italy and France – finally take the plunge and reduce their structural deficits at least to some extent.
However, the risks associated with this strategy are clear. If the reform efforts fail, there is a risk that the newly created burden-sharing structures will lead to the slow disintegration of the Euro area. The incentive which these structures provide to live beyond one’s means without addressing the political and structural issues is very great and could also be taken up without the necessary political pressure. Germany and France must therefore secure the future of the Euro area and, if necessary, facilitate tough decisions for the Euro countries.
The financial markets will initially view greater burden-sharing and integration efforts in a very positive light and will ignore the risks. The benefits of such a development for bonds and equities could be considerable.