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Abu Dhabi, UAEWednesday 12 December 2018

The Art of the Possible: Angela Merkel is the best in business 

German Chancellor Angela Merkel has come up with a detailed and actionable answer to French President Emmanuel Macron’s euro-zone reform proposals

German Chancellor Angela Merkel has come up with a specific answer to French President Emmanuel Macron’s inspirational euro-zone reform proposals. Thilo Schmuelgen / Reuters 
German Chancellor Angela Merkel has come up with a specific answer to French President Emmanuel Macron’s inspirational euro-zone reform proposals. Thilo Schmuelgen / Reuters 

German Chancellor Angela Merkel has finally come up with a specific answer to French President Emmanuel Macron’s inspirational euro-zone reform proposals. This is a minimalist agenda but, unlike Macron’s, it’s detailed and actionable. It’s also largely in line with the European Commission’s ideas.

Discussions for advancing European integration intensified after Mr Macron’s election victory last year. In September, 2017, Mr Macron laid out his vision in a typically windy and sweeping speech at the Sorbonne.

He spoke of a united European military (“Europe’s autonomous operating capabilities, in complement to NATO”), a “genuine European asylum office” to harmonise migration policy, common taxes – a financial transaction one, as well as digital business and environmental levies, plus pooled contributions from corporate tax revenues – to fill a common budget that would be run by a euro zone finance minister. The plan was poor on details and politically iffy, especially its economic part. It was unclear how many European Union countries would be prepared to give up their sovereignty in one of the few areas the EU has left to their sole consideration: taxes.

Mr Macron’s proposals also came just before Ms Merkel’s disappointingly narrow victory in the German parliamentary election. She couldn’t immediately address the Mr Macron proposals because domestic matters required more urgent attention – even the shape of the next governing coalition was up in the air.

In December, the European Commission came up with its own set of proposals concerning a closer economic union for the euro zone. It was a more specific plan than Mr Macron’s. It proposed turning the European Stability Mechanism, used to fund euro countries in crisis, most notably Greece, into a European Monetary Fund, a permanent lender of last resort for nations and distressed banks. It backed Mr Macron’s idea of a common finance minister, who would oversee the EMF and a common budget for structural reforms, which would be part of the EU budget. This minister would be an official of the Commission.

But Chancellor Merkel couldn’t give a specific answer to this proposal, either: Coalition-building was proving more difficult than ever in Germany’s post-World War II history, and a new election couldn’t be ruled out. A German government only came together in March. Ever cautious and focused on consensus-building, Mr Merkel waited for it to jell. It took her until Sunday to produce her vision of workable EU reform, in a rare interview to the Frankfurter Allgemeine Sonntagszeitung, the weekend edition of Germany’s most important establishment newspaper.

On the economic changes, her proposal cuts things to the bare bones. Yes, there should be an EMF to reduce Europe’s dependence on the International Monetary Fund in case of dire emergencies. It should provide 30-year loans based on approved structural reform programs and also be able to give shorter-term, perhaps five-year, credit lines if necessary. It should be run by the member states, not the Commission, though. There should also be a common investment budget, to help along digitalisation and technological progress in general, but it shouldn’t be large – “in the low double-digits of billions,” Ms Merkel said, implicitly rejecting Macron’s proposal of a large budget fed by common taxes. It could even be part of the EU budget, but in any case, it would need to be under strong parliamentary control. And there would be no “debt union” – just “help toward self-help.”

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This effectively reduces Mr Macron’s grand economic union visions to the most politically harmless, and cheapest, measures. It avoids giving the Brussels bureaucracy more power, makes it unnecessary to create new taxes or pay more into the EU budget and limits the financial backstop to the direst of emergencies. What about southern Europeans wanting help with high unemployment? “I’ll be happy to talk to the new Italian government about how more young people can find jobs,” German Chancellor said in the interview.

In a similar way, the chancellor backed Macron’s common military proposal. Sure, Europe should cut the number of weapons systems produced to 30 from the current 180; and sure, there should be a common European “intervention force” that could quickly react to conflict situations. But Germany wouldn’t provide any additional funding for the project, and any German military participation would need parliamentary approval, per the usual procedure.

The only part of Mr Macron’s Sorbonne speech that appears to have fully resonated with Ms Merkel is the part that touches on her biggest domestic weakness – migration policy. In the interview, the chancellor backed the creation of a joint European refugee agency working on the basis of common regulations and issuing European residence permits to eligible people. ms Merkel, however, says she doesn’t want to push too hard on this, aware that previous attempts to create a supranational refugee distribution system has created rifts in the EU, especially between eastern and western European nations. “I believe it’s worth spending an extra week or two looking for a common solution,” she said.

All this may sound disappointing to those who hoped for fast progress after last year’s populist defeats and the pro-European impulse Brexit has given to public opinion on the continent. But, true to her record, Ms Merkel isn’t promising more than she can deliver in a fragile domestic political situation.

It’s far more than nothing, too: A European Monetary Fund, for example, is a major step forward. It’s not as powerful as a common budget, but German society wouldn’t accept one: Even its economic experts are dead set against the idea, as evidenced by a recent open letter from 154 economists, published in the Frankfurter Allgemeine. The EMF fits the German definition of an effective financial backstop: Strict conditionality without rewarding profligacy and economic populism.

Ms Merkel wants to move forward, but without creating undue turbulence. The movement is slow, but the need for speed is not obvious today; Europe is holding together much better than during the recent debt crises. Mr Macron would do well to back the chancellor’s proposals rather than seek to push her further: He has just started the first of two possible five-year terms in power, and at 40, he has plenty of time to drive further gradual change.