Although France’s president-elect has not yet revealed his strategy for eurozone diplomacy, the impression around Europe is that he will push for the sort of deep fiscal integration — with a eurozone budget, finance minister and parliamentary oversight — that his programme describes and his advisers advocate publicly. In Wednesday’s Free Lunch I argued that this would be expending political capital on something more elusive and less necessary than they argue. Today we examine, in the spirit of constructive criticism, what Emmanuel Macron ought to prioritise instead on the European economic stage, if not a euro treasury.
First, there is a case for a common budget — but that is to fund projects that it incontrovertibly makes sense to pay for together. This would most naturally be on cross-border infrastructure: electricity interconnectors, for example, or a proper gas pipeline grid to reduce dependence on Russia. But it is immediately clear that the rationale for such common spending does not end at the border of the euro area. Expanding the EU budget or the existing common investment funds may be better.
Second, there is so much else on which the EU as a whole, or the euro countries, or indeed a smaller subset, can collaborate more deeply. In Macron’s own programme there is a lot to like, such as the call for pan-European party lists (with an intriguing idea of reserving Britain’s seats in the European Parliament for such lists after Brexit), deeper collaboration in defence and security, plans for the digital services sector, a minimum carbon price and the inclusion of clauses against tax avoidance in trade treaties. All of these deserve time, energy and political focus.
Third, Macron can focus on intergovernmental collaboration with a view to setting a precedent for pan-euro/EU integration later, rather than pushing for treaty change to reform eurozone governance. There is talk, for example, of a Franco-German investment fund. And when Macron was economy minister, he and his German counterpart Sigmar Gabriel, now Germany’s foreign minister, commissioned a report proposing areas where France and Germany could integrate their economies further on a bilateral basis. One of the co-authors was Jean-Pisani Ferry, now one of Macron’s most important advisers. The report is an off-the-shelf list of initiatives, including the creation of “borderless sectors” through regulatory harmonisation, and a common corporate tax base (not rate). Macron can immediately dust it off and hit the ground running on whatever initiative Germany is willing to pursue, inviting any other interested party to join on the basis of the EU’s “enhanced co-operation” procedure.
But what about the presumed goal of the eurozone governance ideas: making the eurozone economy perform better for its member countries? Here, too, there are superior policies to the treaty change Macron is thought to be mulling.
Fourth, accordingly, we mentioned on Wednesday that other reforms bearing on the euro are more achievable and more important. Pushing forward with banking union is one; better integrated financial markets — capital markets union — is another.
Fifth, go back to the eurozone treasury idea. As we pointed out on Wednesday, the stated arguments for a eurozone budget are, at heart, calls for a joint borrowing capacity. But the economic logic for joint borrowing does not stand or fall with Germany’s participation. (Nor any other particular euro country, or indeed only euro countries. The necessity of fiscal risk-sharing for the eurozone is overrated, but its desirability for countries that trade with one another is underrated — regardless of whether they share a currency.)
So if Macron really wants joint borrowing, he should take the lead and begin work to create eurobonds with a coalition of willing countries. Such a coalition need not include Germany, so he need not wait for its consent. But if a core group of countries moved to deepen their integration, that might be just what is needed to strike Berlin with the fear of being left behind. Macron would be on stronger ground, and more likely to get German participation in the end, if he simply moved ahead than as a supplicant for German consent.
Sixth, and most important, it is clearly necessary to have less deflationary policies in the eurozone. I have long argued that the eurozone crisis reflected more ill-advised but avoidable policy choices than the euro’s design. That means there is much room for better policy at the national level. The chatter around German resistance to laxer fiscal rules has failed to distinguish between treaty change, for which the consent of Berlin (and others) is needed, and more aggressive fiscal policy at the national level, which is up to the European Commission to sanction or tolerate. (Brussels’ say-so stands unless the Council of Ministers overrules its decisions by qualified majority.)
And the commission could do things very differently, without any changes to the law. The commission is supposed to be the guardian of the European treaties. But to take the treaties seriously means recognising that the current interpretation of fiscal rules is in contradiction with the stated goals of the treaties themselves. A political judgment needs to be made about how to resolve conflicts in the law, and it should be one that prioritises the overall purpose over technical solutions that have become counterproductive.
I have previously written about the many ways in which the treaties allow, indeed require, a change in Brussels’ policy towards a more Keynesian interpretation of the fiscal rules. A commission that vowed to be more political has only moved timidly in that direction — clarifying how it will interpret the rules more “flexibly” and belatedly taking a position on the overall eurozone fiscal stance. But it could do so much more. If it hasn’t, it is because of its fear of powerful member states, Germany above all. But that political calculation is something Macron is well placed to change. There is more support for this even in some German corners than official rhetoric lets on (see for example Mark Schieritz’s comment in Die Zeit).
This, then, should be Macron’s top priority in eurozone economic diplomacy: to give political backing — indeed put political pressure — on the commission explicitly to restore national room for manoeuvre. More reflationary policies would even help fiscal sustainability, as austerity has worsened rather than lightened debt burdens. Macron should couple this with support for orderly mechanisms to write down private and public debts that have got out of hand. In the case of banking, this is something Germany supports. In the case of Greece, Macron could in return push for a definitive solution to the debt overhang.
A Brussels policy more friendly to economic reflation and debt writedowns can be had without treaty change — and should be had precisely because it would better fulfil the treaties as written. Above all, it would demonstrate that the euro and European integration need not be a shackle on domestic prosperity. That is just what Macron’s whole presidency is premised on.
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