Euro Zone Reform

Weak or not, Berlin can still say ‘Nein’

S1AETMMGVPAB
Cloudy skies over Germany's relation to EU. Source: Reuters

Chancellor Angela Merkel may be mired in political wrangling over a new coalition but her caretaker government is still nimble enough to muster a “Nein!” to the European Commission’s ambitious proposals for euro zone reform.

The Brussels bureaucrats want European leaders to discuss a common “fiscal capacity” at their summit in mid-December. This would be a type of common budget that would provide funds to member states to cope with external shocks, or support investments, or incentives for unpopular structural reforms, or restoring international competitiveness – or all of the above.

Berlin doesn’t want to hear about any of this, doesn’t want to discuss it, and will in all likelihood even keep it from being presented to the EU leaders this time around. Germany is not alone in finding these ambitious plans, inspired in part by French President Emmanuel Macron’s agenda for EU reform, at the very least premature. “The appetite for a euro fiscal capacity is in many euro members exactly zero,” commented one high-ranking EU diplomat.

Euro zone reform is a delicate topic for Germany’s politicians, especially now as the parties try to cobble together a governing coalition. Differences on euro reform were responsible in part for the Free Democrats’ withdrawing from talks for a coalition with Ms. Merkel’s conservative alliance and the Greens environmental party. Likewise, the Social Democrats (SPD) have views that diverge from those of the conservatives, even as these parties begin talks on possible cooperation.

The commission’s reform plans are labeled 'long-term political visions' by Brussels insiders – a way of saying 'dream on.'

The proposal by the EU executive to combine the jobs of the economic commissioner and the head of the Eurogroup – the euro zone finance ministers who set policy for the currency – runs into even more resistance. In general, the commission’s reform plans for the currency union are labeled “long-term political visions” by Brussels insiders – a diplomatic way of saying “dream on.”

The commission plans to unveil its reform proposals next week, right after the Eurogroup meets, so the ministers themselves will have no chance to provide input. The timing was a sore point for the deputies preparing that meeting. Their entreaties to allow time for the ministers’ input were rejected by commission staff, who argued that they deal with the government leaders, not the finance ministers. The commission was “once again unteachable,” grumbled a German government official.

The caretaker government in Berlin was already burned this week when Agriculture Minister Christian Schmidt voted to approve a renewal of the EU license for glyphosate, a controversial weedkiller, over the objection of SPD cabinet members and in violation of coalition protocol. Ms. Merkel had to publicly reprimand Mr. Schmidt and it put her on the defensive going into her talks with the SPD.

Aside from the commission’s dreamy “political visions,” Germany is inclined to drag its feet even on the more realistic proposals from the Eurogroup, which may also find their way onto the summit agenda. The euro finance ministers want above all to further the banking union, and in particular the common deposit insurance scheme. Germany wants to see more progress by the banks in winding down bad loans before it is willing to pool risk coverage in this way.

Less controversial are changes for the European Stability Mechanism, which is endowed with a lending capacity of €500 billion. The ESM will take over responsibility for the reform programs of euro members in difficulty. The European Commission has taken the lead role until now in helping to manage, for instance, the successive bailouts of Greece. The commission will continue to be included in these activities.

The ESM will also be empowered to backstop the Single Resolution Fund, a bank bailout fund that is only gradually building up to its €55 billion capacity. That amount is not likely to be sufficient in the event of a widespread banking crisis, so the ESM would be authorized to lend to the SRF if needed. The fact that the ESM, based in Luxembourg, is headed by Klaus Regling, a German national who occupied top EU posts in Brussels, may account in part for Berlin’s greater willingness to accept changes in that institution.

Germany is likely to get is way and substantive discussion of currency union reform will be shelved until later summits in March or even June. But these issues cannot wait forever. The EU cannot live by Berlin’s “nein” alone.

Ruth Berschens is Brussels correspondent for Handelsblatt and Jan Hildebrandt covers economic policy in Berlin. Darrell Delamaide, a Handelsblatt Global editor in Washington, DC, adapted this story into English. To contact the authors: berschens@handelsblatt.com, hildebrandt@handelsblatt.com, and d.delamaide@extern.handelsblatt.com.

We hope you enjoyed this free article.

Subscribe today and get full access to market-moving news in Europe's leading economy.