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Emmanuel Macron and eurozone windmills

Global Economy

Emmanuel Macron and eurozone windmills

France’s champion of Europe should choose his battles wisely

Emmanuel Macron © EPA

Emmanuel Macron’s election victory has proved that the European dream is alive and well. That is to be welcomed by all pro-Europeans. But what does it mean in practice?

In the grand scheme of things, it should bring an overhaul of the Franco-German motor, both in bilateral collaboration and as the duumvirate on which European unity rests. That latter broke down in the financial crisis, with French economic insecurity leading both Nicolas Sarkozy and François Hollande to abdicate France’s role, in a desire to hew closely to German preferences. It will benefit everyone — Germany included — if Macron’s France stops punching below its weight.

In the specifics, however, there is reason to worry whether Macron is choosing his course as wisely as he could. There is a broad narrative shaping up, according to which Macron’s plan is to show France can “do its homework” by passing reforms and showing fiscal responsibility to gain German confidence for a leap into deeper eurozone integration. In the ambitious version of this narrative, well captured by The Economist’s correspondent in Berlin, the new face Macron will supposedly give France should make Germany go along with French ambitions for a eurozone fiscal union. In an alternative and less ambitious version (Dani Rodrik’s analysis discusses this as well as the stronger one), discipline in Paris will simply buy more lenience — especially fiscal flexibility and tolerance of a more active, Keynesian stimulus policy — from Berlin.

The president-elect has done little to dispel this narrative. True, his team reasonably argues that reforms are needed for France’s own sake. That is harder to claim for rapid fiscal consolidation, which risks weakening France’s recovery. The only case is political, as the popular narrative perceives. Charles Grant duly and informatively largely cool response from German officialdom. And Bild, Germany’s most popular tabloid has chimed in with a splash headlined “How much will Macron cost us?”

So what does really Macron want? The campaign proposals are clear enough. Under the heading of a “Europe of growth”, En Marche calls for a eurozone budget and finance minister, controlled by a parliament of eurozone MEPs. Two of Macron’s former advisers, Laurence Boone and Shahin Vallée on Tuesday set out the case for a full-fledged euro treasury, which they think “would be a way to restore discipline at the same time as strengthening the area’s resilience thanks to the stabilising power of a euro budget”.

The case is ultimately grounded in a common, but flawed belief that the “incompleteness” of the euro’s governance structure is what has held back prosperity and growth. It is worth asking what a euro treasury can do for France that is worth the economic risk of fiscal consolidation today and the political capital that could instead be spent to push in other areas of European collaboration. What can a common treasury achieve that existing institutions and national authorities can not?

Not emergency lending: the current rescue fund, or proposed beefed-up versions that Boone and Vallée criticise, can already do that. A permanent common budget would in any case surely be devoted to spending, with crisis lending needing separate authorisation.

The claim could instead be that a euro budget serves broader economic stabilisation functions. One such function is to even out business cycles between countries by channelling funds from countries in the boom phase of the cycle to those in a downturn (in a way that nets to zero over time). But here, Boone and Vallée put too much stock in the supposed analogy with the US dollar. Stabilisation inside the dollar union is achieved through private financial integration, not fiscal federalism. The priority for Europe in this regard should be to push forward with a banking union and a proper framework for writing down cross-border debts.

In any case, would this be good for France? Today (indeed most of the time) the French economy is close to the eurozone average. How would the eurozone budget, if it already existed, make any difference to Macron’s ability to deliver what his citizens want?

The other function is to get fiscal policy right for the eurozone as a whole over time. But the mere existence of a common budget does not ensure this. Fiscal smoothing requires a deficit in bad times and a surplus in good times — that is to say, a common borrowing capacity. And that borrowing, to achieve significant stabilisation, would have to be huge compared with the size of the budget. Note that national budgets make up about 40-50 per cent of the economy, but their stabilising effect is a fraction of that — one study estimates between 13 and 27 per cent of output fluctuations. Any eurozone budget would surely be much smaller.

So getting serious stabilisation bang for the buck (or euro) would require eurozone-level borrowing as big as the budget itself or bigger: the stabilisation tail wagging the budget dog. A budget cannot stabilise without large borrowing capacity, but with such a capacity stabilisation can be ensured without a permanent budget. So if euro-level stabilisation is really the goal, the tool is not a joint permanent budget but large-scale joint borrowing — precisely the thing for which the trust is in shortest supply.

If Macron makes joint eurozone borrowing the priority, the damage would not be limited to a French economic slowdown caused by the tighter fiscal policy thought necessary to lure Germany towards this goal. Spending political capital on something more elusive and less needed than many claim, would lead to lost opportunities elsewhere.

The many other areas in which deeper European integration would help citizens (some of which are in Macron’s programme) would receive less attention than eurozone governance. The need to allow governments to pursue good macroeconomic policy would be overshadowed by the quest for euro-level substitutes for national policy. And worthwhile spending projects that should indeed be funded jointly (but without joint borrowing) may not see the light of day. Martin Schulz says: “If euro states want to tackle common challenges, then a common budget is sensible.” We should dwell on the “if” — and devote calls for a common budget to identifying common projects it makes sense to fund jointly.

On Thursday, Free Lunch will examine some of these alternative possibilities.

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