At the Euro Summit today, Friday 29 June, Leaders of Eurozone countries will discuss the proposed programme of limited reforms agreed by Germany and France on 19 June at a bilateral meeting at Merseberg. Top of the agenda are the completion of banking union and the future of the ESM.
An analysis of the French and German positions give an insight into the context of these discussions. These two countries have agreed in principle to a Eurozone budget to support the single currency. On other issues such as Banking Union and the Commission’s proposal to turn the European Stability Mechanism into a European Monetary Fund which would be enshrined in the treaties, France and Germany will be trying to bridge a divide between a French preference for ‘Risk Reduction’ and a German preference for ensuring adherence to ‘Market Discipline’. While this framework can explain much about their respective positions, there has been a considerable shift in the approach of both since the financial crisis.
During the financial crisis the French approach emphasised flexibility, leaving a large space for discretionary action, while the German approach was to emphasise adherence to rules at the expense of adaptability in a crisis. At the root of this policy preference was a German view that the cause of the crisis was a failure to correctly follow the rules of the Stability and Growth pact and the failure of the EU to convince markets that they were serious regarding the No-Bailout rule in the years before the crisis. Conversely, the French emphasis on discretionary action was based on an idea that markets were volatile and were less trustworthy than government action. The logic underpinning this is that there are multiple economic equilibria and that benign government action could shift an economy from a bad equilibrium towards a good one.
In the current debate on Eurozone reform the French and German positions are based on the same basic economic beliefs but their tactics have changed in an important way. President Macron is attempting to hard-wire what he perceives as correct policy responses into the architecture of the EMU. This reduces the space for political discretion and seeks to ensure that France’s preferred policies can by-pass political disagreement from Berlin and other capitals. In response to this, Germany, has adopted a more defensive position and is trying to ensure that the ability to use political discretion can be retained by national capitals. On issues such as the proposed European Monetary Fund and Fiscal Stabilisation, the German position is to ensure that the Intergovernmental aspect is retained.
The Current Debate on EMU Reform
The European Commission has been sympathetic to the idea of a European Monetary Fund, (EMF), which would replace the Intergovernmental European Stability Mechanism, (ESM), with an EU Institution, which would have a relationship with the European Investment Bank (EIB), somewhat analogous to IMF’s relationship with the World Bank.
While Germany is in favour of some form of EMF, Chancellor Merkel has made clear that it should remain under the authority of Eurozone states, giving national parliaments some say over its decisions.
Second, the ‘Eurozone Budget’, a proposal initiated by France to which Germany gave approval to in principle at Merseberg is intended to provide a stabilising function to Eurozone economies during a downturn. While President Macron proposed a budget of around 300m euros, which would be introduced in 2021, Chancellor Merkel expressed a preference for a smaller two digit budget which would be pluriannual, funded by member state contributions or from a Financial Transaction Tax, which could be grown to provide a serious stabilising effect.
France’s stance of favouring solutions centralised at the EU level and the hard-wiring of their preferred policies into the architecture of the EMU rather than a policy of allowing maximal political discretion over rules may have significant implications for Ireland due to French tendency to link Eurozone reform to reform of the Corporate Tax code. The Merseberg agreement includes a detailed commitment to a common corporate tax base. The issue of corporate tax is conceptually different from Eurozone reform. Ireland will be fighting a defensive battle to ensure that these two issues are not conflated at the Euro Summit on 29 June and in coming debates on EMU reform.
 Werner Hoyer http://www.eib.org/infocentre/press/releases/all/2017/2017-274-strengthening-the-eurozone-eu-bank-president-urges-a-new-push-for-investment-and-reform-imf2017.htm
By Ronan Ward, Researcher, IIEA