14 April 2019

Wolfgang Münchau: We have reached the end of the Franco-German love-in

Emmanuel Macron’s refusal to accept the German-led majority view to agree to a long Brexit extension is perhaps the most clear sign of an end to the love-in between the two countries, writes Münchau in the FT.

[...] What the debate in Germany misses is that Mr Macron owes little to the German chancellor. She managed to fend off most of his eurozone reforms. What is left — a small structural spending facility in the EU budget — is now being challenged by the Netherlands. [...]

The German Social Democratic party under its former leader, Martin Schulz, would have been the ideal partner for Mr Macron. But Mr Schulz, a former president of the European Parliament, did not survive the snakepit of German domestic politics for long. After a disappointing election result, he left the front line. Germany is slowly reverting to its political norms.

This realisation has taken some time in Paris. But the recent publication of proposals on the EU’s future by Annegret Kramp-Karrenbauer, who succeeds Ms Merkel as leader of the Christian Democrats in December has alerted them. AKK, as she is known in Germany, managed to shock the French political establishment with the essay. 

She called on France to give up its permanent seat at the UN Security Council and build a joint aircraft carrier. These proposals lack rhyme or reason, especially given Germany’s low defence spending. She also called on France to relinquish Strasbourg as one of the two seats of the European Parliament. AKK is a domestically focused political operator, agnostic about Europe. So the problem, from the French perspective, is not Ms Merkel. It is what comes next.

France and Germany have deeper bilateral relations than any other EU countries, dating back to Konrad Adenauer and Charles de Gaulle. Recently, Ms Merkel and Mr Macron renewed their vows in the Treaty of Aachen. But the relationship undergoes periodic crises. I fear we are heading into one.

If US president Donald Trump were to impose high tariffs on European cars and other goods, as he periodically threatens, Germany would push the EU towards a free-trade deal. Mr Macron would resist. French agriculture would suffer if the EU opened its markets to American food imports as the US asks. On trade, the interests of France and Germany are diametrically opposed.

Another foreseeable cause of conflict is Mr Macron’s likely opposition to Manfred Weber, the German candidate for the presidency of the European Commission. Mr Weber, the official choice of the centre-right European People’s Party, is tainted by his longstanding support of Viktor Orban, Hungary’s openly anti-Semitic prime minister.

But the single biggest test would be another eurozone crisis. Had it not been for extreme measures by the European Central Bank, the eurozone might not have survived the last sovereign debt crisis. With short-term interest rates at minus 0.4 per cent and a lack of appetite for further quantitative easing, the ECB’s room for manoeuvre in monetary policy is more constrained today. As the International Monetary Fund noted in its latest Global Financial Stability Report, the doom loop between banks and sovereign borrowers lives on. The banking union has made no difference.

The return of the crisis is no distant threat. The synchronised economic slowdown of the global economy may be all it takes. French corporations are heavily indebted. Italy’s fiscal policies are once again out of control. The probability of an Italian sovereign debt restructuring is rising. 

France is more exposed to Italy than Germany. The eurozone badly needs a capital markets union with a joint sovereign debt instrument as a financial stabiliser. It also needs revised fiscal rules to encourage investment. Both are taboos in Germany. Mr Macron, or his successor, will eventually have to confront Germany with a choice between reform or the risk of disintegration.

France and Germany do not disagree on the principle of European political integration, but they are at loggerheads on the most important details. We are headed into a period in which the interests of the two countries and their leaders are diverging. These will be difficult years for the EU.

Full article on Financial Times (subscription required)

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