With Emmanuel Macron becoming France’s new President, one item expected to be marked urgent on his to-do-list will likely be a restart of negotiations on a bolder reform of European Monetary Union (EMU). It is improbable that Macron will push for his liberal reform agenda at home before autumn owing to parliamentary elections in June. Instead, he might turn to European issues, thereby trying to demonstrate effectiveness after taking office. However, his proposals for far-reaching transformation of the Eurozone will face strong opposition from abroad, notably in Germany.
Post-crisis efforts to reform the Eurozone have been under way since 2011 and have already led to important, albeit incomplete institutional changes, such as the Banking Union. But member states failed to achieve consensus on further-reaching reforms, with the effect that proposals under discussion encompass a wide range of differing objectives and scales. After the first reform initiative failed in 2012, the process was due to be relaunched from early 2015 onwards through the Five Presidents’ Report based on contributions from all the EU member states. Eventually, the European Commission, which leads the process, published a White Paper on the Future of Europe in March 2017 and announced the publication of a Reflection Paper on deepening Monetary Union for May 2017, which is to be based on that Five Presidents’ Report. As is apparent from recent efforts, however, any emboldened French push for renegotiation or more concerted move will again bring to the surface some of the deepest fault lines among EU member states.
Worlds apart: diverging EMU paradigms
The disagreements over the reforms needed for the Eurozone are rooted in fundamentally different economic paradigms, which already shaped the founding phase of today’s EMU. One camp argues for the vision of EMU as a stability union, based on principles of internal and external price stability and prioritising rules-based self-regulation of free market forces to minimise political risk. The opposing camp pursues the vision of fiscal union, based on the conviction that the inevitability of market failure means that transnational economic governance must address more than mere price stability. The two visions represent diametrically opposed conceptions of a complete and functioning EMU and consequently diverge widely in their interpretations of the causes of the crisis and the required reform steps.
The stability union/fiscal union divide was fundamental in the process leading to the Five Presidents’ Report. Member states’ contributions communicated in this process to Brussels and the demands contained therein can be classified according to the two diverging reform perspectives into a “map of reform conflict” (see Figure 1):
- Proponents of a stability union (Finland, Estonia, Lithuania, Germany, Malta, the Netherlands, Denmark, Romania, Hungary) reject both expansion of economic governance and deeper fiscal integration.
- Proponents of a fiscal union (Italy, Spain, Portugal, Belgium, Luxembourg, Slovenia, Latvia, France) argue for expansion of both economic governance and fiscal integration.
- Proponents of a fiscal union with restrictions (Cyprus, Slovakia, Croatia, Poland, Ireland, Austria, Czech Republic) call in principle for the EMU’s development but favour movement on only one front: either more economic governance or steps towards fiscal integration.
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The composition of the three camps reveals fiscal union proponents to be the largest group in terms of both population and GDP, holding a narrow majority within the Eurozone even without the supporters of a restricted fiscal union. Proponents of a stability union represent a minority position, being the smaller group under both criteria. The camps also tend to reflect the different economic contexts of the member states: those with higher unemployment dominate the fiscal union group while those with low levels of debt make up the stability union camp.
The stability union proponents are considerably more consistent in their demands than the fiscal union group, which exhibits great variation in key details. This is partly a function of the clearer position of the stability camp, which wants to strengthen existing instruments but rejects steps going beyond the status quo of the existing Eurozone architecture. Their objective is to enhance community-level control over national economic policy to secure structural reforms and budgetary compliance. This control would be guaranteed rather by automatic sanctions than by a Eurozone finance minister with a political mandate. Avoidance of rule-breaking and all forms of transnational transfers and responsibilities as well as reinstating the no-bailout principle (possibly with an insolvency procedure for states) are the main ambitions of the stability camp. The supporters of a fiscal union, on the other hand, are calling for far-reaching reforms in a range of different areas, but share only a small common denominator. Some states plead in favour of a broad set of new instruments, like Eurobonds, a fiscal capacity allowing cyclical financial transfers between the member states as an automatic stabiliser to asymmetric shocks, and go as far as a close coordination of economic, employment and social policies in the Eurozone with the longer term objective of a political union – with an economic government for the Eurozone. Others agree with just some of these proposals and individual positions differ regarding both the scope and timing of reform proposals. What they share is the wish to complement Banking Union, to better use the Macroeconomic Imbalance Procedure on an equal footing with budgetary surveillance and – very generally – to implement some kind of transnational liability in the Eurozone for risk-sharing.
Thus, the euro crisis has reopened a fundamental conflict over the right mix between rules-based free markets and policy intervention. A determined and economically relatively successful group led by Finland and Germany wants to permit only tinkering with the EMU status quo, while a disunited group struggling with economic difficulties, led by Italy and France, is calling for far-reaching fiscal and political integration. In the absence of any decisive choice between the two perspectives, the reform debate has been protracted since 2012 and creates unsustainable compromises, as in the case of Banking Union. Already as Minister of Economic Affairs, Macron aimed to bridge this EMU division by looking for alternative thoughts on the other side of the Rhine. Together with his then-counterpart Sigmar Gabriel he published in 2015 ideas for an “Economic and Social Union”. A process of convergence by setting up an ‘economic Schengen’, a Eurozone budget and institutional alterations, like a Eurozone grouping inside the European Parliament, have been at the heart of their common proposal. As a candidate, As a candidate, Macron has repeatedly indicated that EMU will remain incomplete and poised to fail without major reforms.
In warning signals to Germany and the stability union camp, he suggested several times to move towards investment and institutional changes instead of austerity and defending the status quo. Macron as elected French President will conceivably promote a Fiscal Capacity, Eurobonds, completion of the Banking Union and a more balanced regulation of current account balances as instruments to shift the Eurozone towards a fiscal union. To be successful, he ought to study where his allies stand and then close ranks in the fiscal union camp. Otherwise his European ambitions will turn out as shrivelled as his predecessor’s once the German Finance Minister delivers the stability union’s “Nein” to these plans.
The authors’ study “The divided Eurozone. Mapping conflicting interests on the reform of the Monetary Union” can be downloaded for free at Friedrich-Ebert-Stiftung Brussels.