Source: Freshfields
When Emmanuel Macron was elected President of France, his first official visit was to Berlin.
This long-established tradition is supposed to reaffirm the special relationship that Germany and France forged soon after World War Two when they established the European Coal and Steel Community, the precursor of today’s European Union.
But Mr Macron’s visit was more than symbolic. He was in Berlin to inform Angela Merkel, the German Chancellor, about his plans to reform the French economy – and the eurozone group of 19 countries.
Until recently, France was in no position to set any economic agenda for the EU because its economy was so weak. A strong economy carries political influence and Mr Macron wants to reassert France’s role by returning it to competitiveness. He has already announced plans to liberalise his country’s sclerotic labour market. But his 100-minute speech at the Sorbonne two days after the German election (followed by an hour-long Q&A with students) was remarkable for its ambition and detail. In a nutshell, he said he wanted an integrated EU that would be a ‘sovereign’ powerhouse able to compete with China and the United States. Mrs Merkel, freshly elected for a fourth term as Chancellor – despite heavy losses – was invited to Paris to present her views on Europe’s future.
Hesitation in Berlin
Despite Germany being Europe’s strongest and biggest economy, with record-low unemployment since 1991 and rising exports, Mrs Merkel has held back on calling for more EU integration. Since becoming Chancellor in 2005, she has measured Germany’s political influence. She has rarely, if at all, set out concrete ideas for Europe’s direction and its place in a highly globalised world.
There are several reasons for this. First, even if she wanted to, there has been little appetite among those eurozone member states grappling with low growth or recovering from the severe financial crisis. Reform of the eurozone single currency bloc led by Germany has been way down their agenda.
Second, populist movements and their leaders are opposed to more integration – for them, sovereignty takes precedence. During the French presidential election Marine Le Pen even went as far as to advocate that France leave the euro.
Third, some reforms would demand a change to the EU treaty, which would be almost impossible given the prevailing mood in Europe. And finally Mrs Merkel, even if she saw the need for reform, hadn’t been pushed by other EU leaders into championing it. They were weak. She had no competition. But Mr Macron’s victory has changed the dynamic.
Mr Macron wants to use his presidency to integrate Europe. Mrs Merkel knows the waiting is over. Her coalition partners, the pro-business Free Democrats and the Greens (who are pro-European but with nuances and differences), will demand it. The Free Democrats are uncomfortable with a transfer union – whereby the EU’s wealthier countries would be liable for the debts of poorer member states – while the Greens would support some kind of EU budget and less austerity for indebted eurozone countries. But in essence, Mrs Merkel will have to respond to Mr Macron’s ambitious agenda for Europe. He is in a hurry to restart the Franco-German motor.
Common ground
Berlin and Paris agree that the eurozone countries have to become more integrated. In practice, this could involve the establishment of a finance minister, and budget and banking union for the eurozone – or perhaps even the entire EU.
Berlin could accept the idea of a eurozone finance minister but it would have to be clear how they would be chosen and to whom they would be accountable. But it would be hard to see Berlin accepting both the budget and banking union without clear safeguards for the German taxpayer. France likes the idea of the budget because it would be based on solidarity, financed by corporate tax receipts and supervised by a finance minister. Germany doesn’t because it might not be based on solidity. Berlin’s adherence to a strict EU monetary policy might be undermined, not to mention that another slice of German sovereignty would be ceded to Brussels.
So far, Mrs Merkel has only said she would consider a ‘small budget’ and a common fund to help weaker economies implement tough reforms.
Nor does Germany want the EU or the eurozone to become a transfer union. That would be difficult to sell to the German public and to the German finance minister. Fiscal rectitude, despite the immense social costs of imposing austerity measures on Greece, remains integral to Germany’s economic philosophy.
Despite these differences, Germany and France seem committed to integrating the eurozone in some way and intend to present a more detailed plan in December. By then it should be clear what a more integrated eurozone would mean for the future direction of the EU as a whole.
But in the meantime, two important players have entered the debate: Central Europe and the European Commission.
A challenge in the East
The three Central European countries that have not adopted the euro – Poland, Hungary and the Czech Republic – worry that France and Germany will march ahead to create a two-speed Europe. Poland’s nationalist-conservative governing Law and Justice party is concerned that non-eurozone countries will become second-class citizens, putting Poland on the periphery of the EU.
This view is important. Germany, France and the European Commission cannot afford to have countries ganging up against the EU, potentially generating support for populist and Eurosceptic parties. But one wonders how strong is Poland’s hand.
As it is, Poland is both Eurosceptic and anti-German. The Commission’s decision to start legal proceedings against Warsaw over the way it has undermined the independence of the judiciary and Poland’s Constitutional Court – and Mrs Merkel and Mr Macron’s support for this course of action – has hardened the Polish government’s position, increasing its antipathy to a two-speed Europe and intensifying its sense of victimhood.
So far, Poland has not put an alternative plan on the table. At the annual Economic Forum held in Krynica, ideas presented by Stanisław Karczewski, the Marshal, or speaker, of the Sejm, the Polish Parliament, were somewhat contradictory. ‘We support the concept of Europe composed of countries which display solidarity, which are sovereign, which co-operate closely but which must be sovereign states,’ he said.
For Sweden, Austria, Finland, Germany and Spain, Poland showed no such solidarity when it refused to accept its quota of refugees. As for sovereignty, every country that joins the EU inevitably cedes a certain degree by signing up to the acquis communautaire, the battery of laws and values that underpins the EU. That is particularly so when it comes to the four freedoms enshrined in the European Single Market guaranteeing the free movement of goods, capital, services and labour.
Germany’s incoming government, however, is in no mood or position to antagonise Warsaw. It cannot afford for Poland to press ahead with claims for World War Two reparations, an issue that was closed after the end of the Cold War. The relationship between the two countries would become poisonous – hardly an auspicious beginning for any discussion about the future direction of Europe. But then again, Mr Macron laid down the line to Poland at the Sorbonne. There is a connection, he said, between a country receiving billions of EU and taxpayers’ euros in structural funds and supporting the EU’s fundamental democratic values. If that link is broken, there is a heavy penalty to pay.
As for the Commission’s role…
This is where Jean-Claude Juncker comes in.
The President of the European Commission – the EU’s executive – delivered his annual state of the union speech on 13 September. It was reassuring to all non-eurozone countries, which fear they will be consigned to the slow lane. It was heartening to Germany, given its qualms about the extent of the monetary union. It offered encouragement to France, which yearns for a more integrated EU. This was an inclusive address.
Mr Juncker spelled out how a stronger economic and monetary union would work. First, the European Financial Stabilisation Mechanism, set up to deal with the euro crisis, could be turned into a European Monetary Fund that all member states would have to contribute to. The details will be published in December.
Second, Mr Juncker proposed a European Minister of Economy and Finance who would ‘promote and support structural reforms in our member states’. More importantly, ‘The new minister should co-ordinate all EU financial instruments that can be deployed when a member state is in a recession or hit by a fundamental crisis.’ To allay the fears of the non-eurozone countries, this new minister – whom Juncker said should ideally be a vice-president of the Commission – ‘should also preside [over] the Eurogroup’. As it is, the Eurogroup is pretty unaccountable in ways that fuel suspicion about its long-term agenda. There is now a consensus that it needs to be reshaped.
For Mr Juncker: ‘The European Economy and Finance Minister must be accountable to the European Parliament.’ And in a proposal that would please Berlin but perhaps not Paris, he added: ‘We do not need a budget for the euro area but a strong area budget line within the EU budget.’ Again, this was about soothing those countries outside the currency bloc.
But what is interesting is that Mr Juncker’s remarks about the future integration of the eurozone, besides being inclusive, did not let non-euro countries off the hook.
‘The euro is meant to be the single currency of the European Union as a whole,’ he insisted. Again, in a nod to Central Europe, he said: ‘Member states that want to join the euro must be able to do so. That is why I am proposing to create a euro-accession instrument, offering technical and even financial assistance.’ He also encouraged all member states to join the banking union – in which risk reduction and risk sharing go hand in hand – so that financial institutions operate under the same rules and the same supervision across the bloc.
Mr Juncker’s speech sent a clear signal to Berlin, Paris and Warsaw. A two-speed Europe carries big risks of division and resentment. But Mr Macron and Mrs Merkel – as well as Mr Juncker – know that the euro area is in dire need of integration and the EU is in dire need of ambition. For Mr Macron, the waiting is over. He has put his cards on the table. Mrs Merkel has yet to step out of the waiting room and show her hand.
This article was originally published by Freshfields as part of a report on the Future of Europe.