26 December 2019

Financial Times: Eurozone reform deadlock reflects deep malaise over integration

[...] Reform is much too slow on three fronts: a common eurozone budget, completing the banking union and strengthening the European Stability Mechanism, the area’s crisis-fighting instrument. It is unfair and inaccurate to blame Germany alone. Yet unless Berlin and other capitals break the deadlock, the eurozone will find itself little better equipped to tackle the next crisis, whenever that may come, than it was to handle sovereign debt and banking sector emergencies in 2010-12.

The stalemate is symptomatic of a deeper malaise in European integration. Whether it be migration policies, attitudes to Russia or the size and focus of the EU’s 2021-27 budget, the Europeans are divided. [...]

Although the Europeans have taken some measures, a great deal remains to be done. For example, they have committed themselves to building a “budgetary instrument for convergence and competitiveness”, exclusive to eurozone countries. But resistance from Germany and its northern allies means that the small sum envisaged for 2021 to 2027 — and even this is not yet agreed — will never be enough to stabilise the eurozone economy in a downturn, as urged by France and its supporters.

Progress on banking union appeared possible in November after Olaf Scholz, Germany’s finance minister, proposed a common deposit insurance scheme. Although he attached strict conditions, there has been an encouraging response from the central bank of Italy, normally a country suspicious of Germany’s views on how to treat banks’ ownership of government bonds.

However, Mr Scholz’s initiative does not represent an agreed line of the Christian Democrat-Social Democrat “grand coalition” government to which he belongs. His political authority has suffered from being defeated in the contest for the SPD’s leadership, a race won by a pair of little-known regional leftwingers. As for the substance, disputes over deposit insurance are in turn tangled up with efforts to strengthen the ESM, with domestic Italian political rivalries playing a part in the muddle.

The eurozone’s deadlock also derives from the frictions in Franco-German relations since Emmanuel Macron was elected French president and the waning of Chancellor Angela Merkel’s authority in Germany. Mr Macron’s looser fiscal policy since last year’s gilets-jaunes protests, and the strikes and demonstrations against his pension reform proposals, have aroused doubts in Berlin about his commitment to budgetary discipline and domestic reform. Worse, the Germans see Mr Macron as impetuous and prone to unveiling grand initiatives without first consulting allies.

Conversely, Paris sees Ms Merkel’s government as stubbornly reluctant to engage with French ideas for eurozone reform. This caution is attributable partly to never-ending quarrels in the grand coalition, and to Germany’s deep-seated shared conservatism on economic policy encapsulated in the CDU’s tweet.

In some respects, the mood is changing. The BDI, Germany’s main business lobby, and trade unions are calling for a €450bn public investment programme. Impatience with the CDU’s “small fetish” for balanced budgets is growing, including at the Bundesbank. The grand coalition may give up the ghost before September 2021. A power shift in Germany is probably coming, and it may pave the way for a more energetic effort at eurozone reform. Whether it will be too late is another matter.

Full article on Financial Times (subscription required)

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