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The Franco-German honeymoon has ended. At the beginning of the year, Angela Merkel, German chancellor, and Martin Schulz, the former leader of the Social Democratic party, agreed that Germany would enter into a meaningful dialogue with Emmanuel Macron, the French president, on reform of the eurozone, reported Financial Times (US).
As it turned out, the eurozone agenda was a personal project of Mr Schulz’s, not of the SPD. When he was ousted as leader in February, the party lost interest. The grand coalition is once again in power, but now without the only interesting project that would have justified its existence.
Olaf Scholz, the SPD finance minister and the party’s new strongman, is notably cool on the whole idea. On the important issue of a European deposit insurance scheme, he is as sceptical as his predecessor, Wolfgang Schäuble.
The opposition to eurozone reform from inside Ms Merkel’s party, the CDU, and its Bavarian sister party, CSU, is as strong as ever. The CDU/CSU group in the Bundestag rejects all but one of the items on Mr Macron’s reform agenda. They do not want an enlarged European Stability Mechanism, the rescue umbrella, nor a single eurozone budget. And like Mr Scholz they do not want a European deposit insurance scheme until the Italian banks have managed to get rid of most of the bad loans on their balance sheet.
They do not want debt relief for Greece, either. The only reform idea for which there is some lukewarm support is that of a fiscal backstop to the bank resolution fund, something that should have happened a long time ago.
The message is clear: Germany is saying no to Mr Macron on eurozone reform, at least in substance. There may still be some token deal, perhaps a tiny eurozone budget with no macroeconomic significance. To add insult to injury, Ms Merkel also preemptively ruled out German involvement in military action against the Syrian regime.
I wonder how those two unrelated messages from Germany will be received. France is now in exactly the position Marine Le Pen, leader of the far-right National Front, has warned about: in a monetary union in which the voice of France counts for little and a geopolitical situation in which the UK is the more reliable partner.
Mr Macron’s enthusiastic support for European integration contrasts with the unchanged political reality that France and Germany are no longer natural allies. Unlike in France, the pro-European parties in Germany are in retreat. Ms Merkel’s party lost 1m votes to the Free Democrats and the Alternative for Germany, both of which advocate policies that would lead to the destruction of the eurozone. Sixty CDU/CSU MPs voted against the Greek support programme in 2015. If faced with a similar rebellion today, the grand coalition would no longer have a majority.
Does this make eurozone reform impossible? I do not think so. The June deadline for eurozone reforms was chosen because Mr Macron needs something concrete to show before the European elections in May 2019.
As a longstanding advocate of eurozone reform, I am finding myself in the unusual position of favouring a tactical retreat. It would be better to wait for a better moment to push the two issues that really matter, neither of which is on the agenda right now: the creation of a single safe asset, or a eurozone bond; and the legal and political separation of national governments and their banks.
Reformers should exploit the fact that the large and persistent current account surpluses of the northern eurozone countries make them vulnerable to a sudden disruption of trade flows. Only an existential crisis that threatens the very survival of the eurozone has the potential to concentrate minds in the northern eurozone. A very large current account surplus makes you strong in good times, but weak in bad. Now is not the moment to extract concessions from Germany or the Netherlands.
The alternative is wasting scarce political capital on weak reforms. We would also have to accept conditions that might add to financial instability, like Germany’s demand for a semi-automatic debt restructuring or caps on bank holdings of sovereign bonds. If the alternative is a big leap in the wrong direction, standing still would constitute relative progress.
show source https://www.ft.com/content/4db75b80-3f1e-11e8-b7e0-52972418fec4