It’s been almost a year since Emmanuel Macron won the presidential elections in France. What followed was a wave of ‘europhoria’, as all those in the EU with pro-European sentiments felt in the ascendant and were hoping that the eurozone would at last move to the next stage of integration. A long political impasse in Berlin then took the energy out of the wave. But the europhoria briefly returned when Germany’s CDU, CSU and SPD finally signed a coalition agreement that looked and sounded pro-European.
Now even that more cautious europhoria appears to have been misplaced. The latest utterances from Germany suggest that meaningful reform of the euro zone will stay elusive. The governments of Denmark, Estonia, Finland, Ireland, Latvia, Lithuania, the Netherlands and Sweden recently wrote a joint letter in which they basically demanded small and cautious steps towards further integration, rather than bold leaps. Germany, as the largest country in this northern bloc, appears to agree.
Thus the new German finance minister, Olaf Scholz, has said that the major plank of euro-zone reform plans, a European deposit insurance scheme, though a good idea at some point, is out of the question right now. This message was echoed by Bundesbank President Jens Weidmann. Mr. Weidmann added that any “macroeconomic stabilization facility” should not go beyond a limited “rainy day fund”.
Failure to reform the euro zone now means when the next recession comes around, the ECB will again have to step in.
The pro-European Greens in opposition in the Bundestag say that what remains falls far short. Annalena Baerbock, a leader of the Greens, “has the sense that the euro-zone chapter of the coalition agreement has been closed, unread”. Angela Merkel appears to be losing domestic support for new euro-zone reforms, as every single new reform would mean shared liabilities or transfers, an idea that German taxpayers find unpalatable and the conservatives in Ms. Merkel’s bloc find as appealing as Voldemort.
All those, from supporters of Emmanuel Macron to investors, wanting more fundamental reforms are concerned about this German dithering. They await the next European Summit in June, where Berlin will have to show its hand. They are likely to be in for more disappointment.
Only three reforms will probably survive Berlin’s scissors. First, Germany will agree to making the European Stability Mechanism (ESM) a financial backstop for the Bank Resolution Fund, which is to take care of winding up failing backs. Second, Germany may also agree in general principle to turning the ESM into an “EMF”, a European Monetary Fund modeled on the IMF in Washington, but without giving details. Third, Germany may agree to setting aside a dollop of the next EU budget for the euro zone, but without naming numbers or terms.
The bigger reforms hoped for by the europhorics stand little chance of getting past Germany. The euro zone won’t get a finance minister. Nor will it get a permanent budget which it could use for countercyclical fiscal policy.
The euro zone has become much more resilient than it was ten years ago. It can now absorb shocks much better than in the past. And yet, in any new crisis, the destiny of the monetary union will still be in the hands of national governments answering to their domestic voters.
Pro-Europeans may try to lean on the crutch of other reforms. Perhaps the EU can agree on common immigration rules, border controls, or a defense union. These steps are good ideas and might drum up popular support for the EU. But they would not make up for the missed opportunity to reform the euro zone.
Failure to reform the euro zone now means that when the next recession comes around, the ECB will yet again have to step in as the warden of monetary union, with more of its unconventional policies that in turn fire up euroskeptics. There may have to be more ad hoc “bail-outs”, which once again sow discord between northern creditor nations and southern debtors. By letting this window of opportunity close, Germany gives ammunition to those who yearn for breaking up the currency union altogether.
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