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Macron hopes German coalition deal could boost eurozone reform

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French president Emmanuel Macron with Angela Merkel during an EU summit in Brussels on 14 December, 2017 Reuters/Yves Herman

The deadlock between France and Germany on reforming the eurozone might be easing, as German Chancellor Angela Merkel is negotiating a coalition with the pro-European Social Democrats (SPD). French President Emmanuel Macron is seizng the opportunity to push his own agenda forward.


The differences between France and Germany, which together account for about half of eurozone output, are a difference of perspective: Germany wants more budgetary discipline; France wants more solidarity between member states.

“In the Franco-German political dialogue it’s like a deadlock, because the French are arguing in favour of more risk sharing and the Germans are arguing for more risk reduction first,” economist Agnès Bénassy-Quéré told RFI.

Reducing risk depends on sharing it, she says, giving the example of reforming the banking sector.

"If you want to reduce risks in the banking sector, in doing so you may have instability and a risk of panic by depositors," she argues. "Then you need deposit insurance at the European level to avoid this kind of panic in a specific country. So this is a risk-sharing scheme accompanying a risk-reduction strategy.”

Bénassy-Quéré was one of 14 prominent economists, French and German, who worked together for six months and this week presented a paper with suggestions that might appeal to both France and Germany.

Weaknesses not resolved despite 2009 crisis

Financial, fiscal and institutional problems were revealed during Europe’s 2009 debt crisis and they have not been resolved, which means the eurozone would be unlikely to survive another such trauma.

The economists recommend an overhaul of eurozone fiscal rules,which they say are “complex and unreliable”.

They also recommend revisiting the rule that countries must keep their fiscal deficits under 3.0 per cent of GDP, instead basing deficits on more long-term economic indicators.

And they suggest creating a fund to help countries hit by crisis.

These are not revolutionary proposals and Bénassy-Quéré says they are presented in a way that is “workable” politically.

“I think some political agreement can come from this proposal,” she told RFI, even though there are elements in the proposals that one or the other does not like. “Germany does not like the fiscal capacity, or changing the fiscal rules. In Paris, they don’t like the idea of issuing Junior Bonds or safe bonds, they are sceptical of that. But, if you want an agreement, you need to balance all points of view and I think this kind of proposal can fly.”

German coalition talks

Negotiations are getting a boost from long-running talks in Germany to form a coalition government between Merkel’s conservative CDU and the SPD.

“With the negotiations within the coalition in Germany we think there is a window of opportunity, because we think there will be a pro-European government, if we have the CDU and SPD,” Stephane Colliac, an economist with Euler Hermes, a Paris-based business insurance company, told RFI.

“France can propose a kind of tradeoff, as we are implementing many reforms now. The government began with a reform of the labour market. And we plan to adopt a reform of the corporate sector by March, a kind of ‘Loi Macron 3.0', with the intention to change the whole functioning of the economy.”

But Agnes Bénassy-Quéré cautions that the momentum to reform the eurozone could run into trouble.

There is no current crisis and therefore no impetus to change, she points out.

“Growth is resuming so the risk is not thought as so acute,” she says, adding that banking reform is not as politically gripping as security or refugee policy. People think the crisis is over… [But] during the next crisis, our monetary policy will not have much room for manoeuvre and our fiscal policy even worse, because of accumulated debt. The banks in some countries are very exposed to sovereign risk, so if there is a debt restructuring in one country than the banks of that country will be at risk. And this is systemic for the euro area.”

Merkel and Macron have pledged to come up with reform proposals by March.

Their window to do so is relatively narrow, given that the political winds may change yet again, with Britain’s upcoming exit from the EU and European Parliament elections next year.