German politics risks affecting eurozone reform

Merkel and Macron continue to hold different views on the subject of the economy. [Ronald Wittek/EPA/EFE]

The leaders of France and Germany’ will meet in Berlin on Tuesday (19 June) for a preparatory summit ahead of the European Council at the end of the month. But the two countries continue to hold different views on the subject of the economy. EURACTIV.fr reports.

European countries will finally have to agree on an ambitious roadmap on the eurozone, but also defence, and migration at the European Council on 28-29 June. German Chancellor Angela Merkel and French President Emmanuel Macron are meeting on 19 June to prepare for it.

However, an unprecedented political crisis in Germany calls into question any ambitious reform for the time being. “This is the end of the Merkel method, which does everything too little, too late, in fear of the upcoming elections. This time it won’t work anymore,” said a German MP.

Elections will be held on 14 October in Bavaria, where the CSU, the historical ally of the CDU, operates. To ensure their victory, CSU members are constantly challenging Merkel, in particular on the issue of migration, going as far as threatening to leave the parliamentary group, which would de facto put an end to the current government.

Limited response from Germany

Angela Merkel is therefore in quite a tight spot. At a time when France is extending its hand with a view to building a budget for the euro area, a subject that was still a red line for the French Finance Minister Bruno Le Maire, the German response is likely to be extremely limited.

The “too political” vision of the European Semester, the process of controlling national budgets managed by the Commission, did not please Berlin. Since 2014, the Juncker commission and the French Commissioner Pierre Moscovici have in fact adopted a softer stance than the previous Commission towards the countries that spend most, in order to maintain European support for the project.

But for Berlin, their analysis “lacks objectivity”, according to a member of the Chancellor’s council, and Merkel plans to entrust this supervisory role to the European Stability Mechanism in exchange for a reinforcement of its means.

It would be a minimal response to France’s ambition to tackle the macroeconomic imbalances of the euro area by promoting investment transfers to countries that lack them the most, especially in the South.

“The European stability mechanism has no function today because there remains only one country in difficulty, Greece, so it makes sense to entrust it a new mission,” said a source in Berlin, where Klaus Regling, the German managing director of the ESM, is viewed as being more reliable than the European executive.

France ups the pressure for eurozone budget

Without reform the euro area won’t survive, according to France’s economy minister, adding to the pressure on Germany a few weeks ahead of a crucial European Council summit. EURACTIV.fr reports.

Germany seems ready to up the pace to complete the reform of the multiannual financial framework (the European 2021-2027 budget) by the end of the year, which does not correlate with France.

To the extent that it proposes adding funds: the Commission has put forward a proposal to invest 1.1% of the GDP of each country, which would involve increasing the contributions of net contributors, such as France and Germany. On the French side, the government sees no urgency to accelerate the pace, particularly because of a disagreement on the common agricultural policy.

In the absence of a eurozone budget, Germany’s Finance Minister Olaf Scholz recently put forward the idea of a European unemployment insurance. At the macroeconomic level, such a proposal has an appeal comparable to that of a common budget, allowing for a minimum of redistribution and thus mitigating asymmetric shocks.

But such a proposal has little chance of succeeding because of timing: it would be difficult to complete such a project in one month. On the other hand, the same SPD minister torpedoed the idea of the digital tax dear to France, which would allow recovering a part of the tax that Europe cannot get from the GAFA (Google, Apple, Facebook, Amazon).

Therefore, on economic issues there seems to be no shared view and solution. However, Europeans are waiting on the EU mainly on the issues of security and migration.

“The real urgency is to make a Europe that protects, and it concerns security and defence, not economic issues,” said Joachim Bitterlich, a diplomat and former adviser to Helmut Kohl. Bitterlich also stated that progress on the common defence that should be presented in late June “represents a huge step for Germany”.

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