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Hurdles to Franco-German bargain on euro zone are high
June 4, 2017 / 7:15 AM / 4 months ago

Hurdles to Franco-German bargain on euro zone are high

German Chancellor Angela Merkel and French President Emmanuel Macron address a news conference at the Chancellery in Berlin, Germany, May 15, 2017. REUTERS/Fabrizio Bensch

BERLIN (Reuters) - Midway through their news conference in Berlin last month, French President Emmanuel Macron turned to German Chancellor Angela Merkel and laid out a quid pro quo on strengthening Europe’s single currency project.

“Everyone has a job to do,” Macron said.

“I have to press ahead with reforms that are necessary for our country and for restoring trust between France and Germany. And the chancellor must make a convincing case to her public, to her political class.”

Macron campaigned on a promise to “rebuild” Europe through deeper integration of the euro zone, the 19-nation currency zone which ranks as one of the EU’s biggest achievements but which critics say is still work in progress 18 years after its launch.

He seems determined to fulfill his side of the bargain.

Polls suggest his new party, la Republique en Marche, could win an absolute majority in parliamentary elections this month. That would make it easier for him to deliver on his plans to reform the French economy.

But in Berlin, questions remain about whether Merkel will embrace the leap in European integration that Macron wants. That would mean taking on sceptics in her party who remain reluctant to compromise with the new president of France, a country they worry has a vision of a Europe in which Germany has to pay for the failure of others to knock their economies into shape.

Macron’s team was elated with their Merkel meeting in Berlin. She agreed to work with them on a “roadmap” for euro zone reform and hinted at the possibility of radical steps that would require changes to the European Union’s Lisbon treaty.

Last Sunday, she appeared to double down on the idea of closer European cooperation, telling a political rally in Munich that the continent may no longer be able to count on the United States and must take its destiny into its own hands.

But people close to the chancellor who spoke to Reuters on condition of anonymity said it would be wrong to interpret her recent remarks as a sign that Berlin is preparing to water down the principles that have guided it for years: those of a rules-based Europe where “responsibility” trumps “solidarity”.

“The chancellor did not say what she said in Munich because she wants to prepare the ground for making financial concessions to Macron,” a top aide told Reuters.

SMALL STEPS

At the heart of Macron’s plan for Europe is the creation of a euro zone finance minister who would oversee a pooled budget for investments and transfers intended to help euro zone members cushion downturns. That official would be answerable to a euro zone parliament, or sub-section of the European Parliament.

Germany’s Social Democrats (SPD), junior partners in Merkel’s “grand coalition”, have backed this approach. But opposition among Merkel’s conservative allies runs deep.

In conversations with half a dozen lawmakers from Merkel’s Christian Democratic Union (CDU) a picture emerged of a party that would prefer to take small symbolic steps with France - identifying joint investment projects or aligning corporate tax rates - than contemplate the big changes that Macron is seeking.

Many of the lawmakers said they were worried about alienating non-euro countries in eastern Europe and Scandinavia with an aggressive push for deeper cooperation between members single currency bloc.

They also argued that none of the steps being proposed by Macron could be done without treaty change, a multi-year process fraught with political risks.

“There are those that say we need to do everything in our power to ensure Macron is successful, otherwise we’ll have (French far-right leader) Marine Le Pen five years from now,” said Thorsten Frei, a CDU lawmaker and member of the European Affairs committee of the Bundestag.

“I don’t share this viewpoint at all. What we need to do is build Europe in the right way,” he said. “We should not be lurching into a quick deepening of the euro zone.”

Guenther Krichbaum, another CDU member and head of the European Affairs committee, said Macron’s ideas for a euro zone budget and parliament made little sense because they would only duplicate EU structures.

“When Britain leaves, 85 percent of the EU budget will be financed by members of the euro zone. You don’t need an extra budget for the euro zone on top of that,” he said.

BLACK-YELLOW

Whether Merkel is prepared to push back against the sceptics, as Macron suggested last month, may not become clear until after the German election in September.

But people close to the chancellor say they do not expect her to make a strong case for deeper European integration during the election campaign.

“Of course we will talk about Brexit. We will talk about the new Franco-German tandem,” the aide said. “But this will not be a plebiscite on Europe.”

Much could depend on the outcome of the vote. While the polls suggest Merkel’s conservatives will come out on top, the make-up of her next coalition is uncertain.

If her partnership with the Macron-friendly SPD continues, the prospects of a Franco-German deal increase. However if she forms a centre-right coalition with the liberal Free Democrats (FDP), as recent surveys suggest might be possible, then hopes for a bargain could fade.

FDP leader Christian Lindner was one of the first politicians in Germany to criticise Macron’s proposals for Europe after his election victory in early May.

“It would be difficult for Macron if Merkel ended up in a coalition with the FDP, a party which has lost its pro-European course over the last years,” said Franziska Brantner, a lawmaker for the Greens party. “On the issue of closer euro zone integration that would be very tough.”

In a so-called “black-yellow” coalition with the FDP, Germany’s hardline Finance Minister Wolfgang Schaeuble would almost certainly remain in his post.

Schaeuble was once a champion of closer European integration. But after years of economic and financial crisis in the euro zone, he has come around to the view that grand leaps forward are unrealistic.

“From Macron’s perspective, a grand coalition without Schaeuble would be best,” said Claire Demesmay of the German Council on Foreign Relations. “But no matter the outcome, it’s hard to imagine Germany doing something big in the euro zone.”

Reporting by Noah Barkin; editing by Mark John

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