Germany takes the wheel

Time is running out for euro-zone reform

euro zone reform, monetary union
Stop joking around, Olaf. We need to give them an answer. Source: DPA

Angela Merkel and Emmanuel Macron have a schedule: The two leaders hope to reach a Franco-German deal on euro-zone reform by June. The trouble is, by then it may be too late.

Sharp disagreements among the 19 nations using the euro have led to paralysis in the ongoing debate about exactly how to make the bloc fit for the future. And with elections for the European Parliament coming in May 2019, there’s precious little time to reach a deal without overt politics coming into play.

“Time is running away from us,” Valdis Dombrovskis, the EU Commission’s vice president, told Handelsblatt. Those comments were echoed by Klaus Regling, the German head of the euro zone’s emergency fund known as the European Stability Mechanism. The political will to reach a deal to deepen the euro zone is evaporating, Mr. Regling warned.

And Germany could hold the key to breaking the deadlock. While the euro zone is waiting on a Franco-German position paper, another step has to happen first. Before any deal can be reached with France, Chancellor Merkel’s own coalition government needs to get on the same page.

The delay in forming a government after Germany’s federal elections in September hasn’t helped. But neither has an ongoing dispute — even once a government was finally formed last month — between Ms. Merkel’s conservative Christian Democrats and their coalition partner, the Social Democrats, led by the less-austerity-friendly finance minister, Olaf Scholz.

The good news? Ms. Merkel and Mr. Scholz’s differences mimic the fault lines between euro-zone members as a whole. If the CDU and SPD can reach a common position, there could be hope for a broader deal yet.

There are two key stumbling blocks on policy. The first has to do with unifying regulations and rules across the euro zone’s banking systems. Supporters are pushing for a common deposit insurance scheme as the final step in the so-called banking union.

The battle over risks has threatened to torpedo the entire euro-zone reform process.

Northern Europeans and conservatives in Germany worry this could put taxpayers on the hook for bad loans still languishing in southern European banks. They’re demanding a cap on liability for any pan-European deposit system, and even pushing for creditors of indebted nations to pay a portion of the bill if it gets too high. Lars Feld, a German economist and member of a government advisory panel, noted in an op-ed for Handelsblatt that debt restructuring has long been on the table. He proposes a system with rules to incentivize creditors to agree a restructuring that would be in their own interest before any bailout funds were released.

There’s no compromise in sight. Southern European countries, as well as France, have favored more risk-sharing and resisted caps and suggestions of a debt restructuring mechanism. Mr. Scholz, a center-left German politician who has sympathies with both views, has been rather cagey on where he stands so far. But sources say he recently pushed back on the EU Commission timetable for introducing a deposit insurance scheme and backed conservatives’ calls for paying greater attention to risks. Nevertheless, Mr. Scholz could be key to breaking any deadlock.

The battle over risks has threatened to torpedo the entire euro-zone reform process. That would put the second main project — creating a European Monetary Fund — in jeopardy, too. The EMF would essentially be a European version of the International Monetary Fund and an upgraded version of Mr. Regling’s emergency firewall. The ESM would offer financial support and run programs for euro-zone members facing an economic crisis.

Mr. Dombrovskis, who will be in Berlin Friday for talks with Mr. Scholz, said he’s waiting for “concrete decisions” on exactly how risk reduction and risk sharing can be combined before the entire process can move forward. The question is how long Ms. Merkel and Mr. Scholz will keep him waiting.

Ruth Berschens is Handelsblatt’s bureau chief in Brussels. Christopher Cermak is an editor for Handelsblatt Global in Berlin. To contact the authors: berschens@handelsblatt.com and cermak@handelsblatt.com

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