Macron, Merkel and the future of the euro by Charles Grant
Emmanuel Macron wants to change the way the eurozone is run. But can he persuade Angela Merkel? Throughout much of the EU’s history, a strong alliance between France and Germany has been a necessary, though not sufficient condition for European integration. They hold fundamentally different views on many issues, which means when they have found a compromise, their partners usually follow. In this century, however, the tandem has lost its force. The EU’s eastern enlargement reduced the relative weight of France and Germany. And then in recent years, the weakness of the French economy – combined with the passivity of President François Hollande – led to an imbalance between Berlin and Paris. The euro was a Franco-German project, but the pair have disagreed on how to resolve the single currency’s problems. Germany has wanted stricter rules on government budgets and new mechanisms to push countries like France and Italy into painful structural reforms; France has sought more active macroeconomic policies, common instruments such as ‘eurobonds’ (which would mutualise debts) and steps towards a ‘transfer union’. But Germany has set the agenda and mostly ignored French ideas. As Hollande’s economy minister, Emmanuel Macron tried hard to change German thinking. He wrote an article with his German opposite number, Sigmar Gabriel of the Social Democratic Party (SPD), calling for a European Monetary
Fund as well as a eurozone budget to stabilise demand across the economic cycle. But Angela Merkel and Wolfgang Schäuble, her finance minister, stuck to a rules-based approach that prioritised fiscal discipline and structural reform. So Macron knows that shifting German policy will be hard. His plan is to impress the Germans by reforming France – for example by cutting the non-wage costs of employment, lowering the state’s share of economic output and introducing Nordic-style active labour market policies. He hopes that success will give him the credibility to go to Berlin and propose a concordat on the euro and much else. Though Germany’s establishment is delighted with Macron’s victory, it is split on how to respond. Those close to Merkel and Schäuble, like many Christian Democrats, doubt that Macron can achieve much reform in the short term. They remain wary of the Keynesian, demand-focused thinking espoused by the French. In the words of one Merkel aide: “The rest of the EU should not pay France to do what is good for France.” But in the foreign ministry and SPD circles, senior figures favour a more enthusiastic response and want Germany to moderate its orthodox line on the euro. One of them is pushing for a new Franco-German treaty (modelled on