Social Europe

politics, economy and employment & labour

  • Themes
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Renewing Franco-German Axis: Challenges For Eurozone Reform

Gabriele de Angelis 12th February 2018

Gabriele de Angelis

Gabriele de Angelis

If approved, the results of the agreement in principle (German text here) on the renewal of the Grand Coalition in Germany could be an important milestone in stabilising the Eurozone. In essence, they give the green light to a good portion of French President Emmanuel Macron’s proposal to turn the European Stability Mechanism (ESM) into a proper European Monetary Fund (EMF) under parliamentary control and to introduce a specific EU budget line for economic stabilisation and social convergence. And yet, two important pieces are still missing: fiscal coordination and risk sharing, without which solving the puzzle of Eurozone stabilisation may turn out to be dangerously incomplete.

Stabilising the Eurozone through investments?

Of all the hypotheses on the table, the European Commission ultimately selected bolstering investment as its strategy for implementing a stabilisation function for the Eurozone. In his State of the Union Address, President Juncker delineated a clear roadmap for economic reform in Europe. The broad message was that economic recovery testifies to the success of flexible implementation of the Stability and Growth Pact. It also shows that his investment policy, as implemented through the Investment Plan for Europe, was correct. In order to consolidate this strategy, Juncker is aiming to establish a dedicated Euro Area budget line for structural reform assistance, a stabilisation function, a backstop for the Banking Union, and a convergence instrument for Member States who are on their way to joining the euro. The stabilisation function would help to keep national investment levels high in the event of a significant and abrupt economic downturn. It should be fiscally neutral over the medium term so as not to lead to permanent transfers between Member States and would be accessible to those who comply with the fiscal rules. With the exception of the backstop for the Banking Union, these points are being faithfully mirrored in the exploratory talks.

Help with pushing through this part of the reform plan can be expected from Macron, who subscribed to a similar, though clearly more audacious, approach in a series of interviews and speeches given over the past years, first as Economics Minister and then as President. The important difference between Macron on the one hand and Juncker and the prospective German coalition on the other is the role they ascribe to cross-border redistribution: a consistent one for the first, none for the latter. As reactions from the German side reveal, here lies the main fault line. The exploratory talks in Berlin now espouse President Juncker’s proposal to stimulate convergence through an investment facility with increased German funding. This could square the circle for the next round of discussions, but it is hardly conclusive for the Eurozone’s stabilisation.

Besides the stabilisation function, which would only be triggered on rainy days, boosting investment through a common budget could also contribute to stabilizing the Eurozone inasmuch as investments are distributed inversely to GDP, according to the EIB’s own figures. For want of further details, it seems reasonable to assume that future EU-stimulated investments will continue on the path traced by the Investment Plan for Europe. This clearly contributes to Eurozone economic growth in two ways: by boosting overall investment and by privileging the seemingly needier countries. The Plan seems to have been met with acceptance even from less solidarity-friendly Member States thanks to the fact that it aims to leverage private capital through a relatively small amount of public investment (€26bn from the EU budget up to 2020), thus causing no additional costs to anyone, so far.

Nevertheless, neither the Plan nor the future budgetary instruments that the Commission has put on the negotiating table seem to do much to address the roots of the Eurozone’s weaknesses, which lie in persistent macroeconomic imbalances (Graphs 1 and 2; source: EUROSTAT) that can only be remedied by effective macroeconomic coordination. This is exactly what no Member State seems ready to sign up to, even though the Commission has repeatedly stressed the point over the past two years.

Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content.


We will never send you spam and you can unsubscribe anytime.

Thank you!

Please check your inbox and click on the link in the confirmation email to complete your newsletter subscription.

.

Source of Data: Eurostat

Regional imbalances can be more or less sustainable, depending on whether local income and GDP growth are enough to service the debt. Their persistence, however, shows that something is definitely not working with the Eurozone economy. EU fiscal and austerity policies have thus far tried to restore the balance through deflation in deficit countries. To some extent, they have been successful in reducing current account deficits (while having only a minor impact on Net International Investment Positions), as the following tables show (source: EUROSTAT).

3 year average of Current Account Balances as % of GDP; source: EUROSTAT
DK DE EL ES FR IT NL AT PT
2010 3.9 5.9 -12.1 -6.5 -1.7 -2.8 5 3.5 -11.2
2016 8.4 8.1 -1 1.4 -0.7 2.1 8.6 2.2 0.3
Net International Investment Position as % of GDP; source: EUROSTAT
DK DE EL ES FR IT NL AT PT
2010 10.3 38.4 -92.5 -89.5 -10 -23.9 28 -9.8 -107.5
2016 54.8 54.4 -139.3 -83.9 -15.7 -9.8 67.7 5.7 -104.7

However, this strategy only worked because ECB monetary policy counterbalanced its growth-depressing effects. Moreover, such a strategy implies an unequal distribution of the burden of convergence and does nothing to prevent future crises. Fiscal cooperation is far more promising, in this respect, as the self-same Commission emphasises.

Latterly, the Commission has put much emphasis on showing that an appropriate aggregate fiscal policy in support of monetary policy is a key instrument in ensuring that budget consolidation does not blot out growth. Effective coordination of the Member States’ fiscal stances would generate positive spill-over effects between surplus and deficit countries and help overcome the problem of macroeconomic coordination among them. In particular, it would allow those who must heed fiscal consolidation to do so without incurring macroeconomic contraction, while allowing those with more fiscal space to reap the rewards of their “fiscal virtues”. Unfortunately, the current fiscal framework allows neither for the coordination of fiscal stances nor for the redistribution of consolidation and growth efforts across countries. The Member States do not seem ready to change this, as they made clear in the Eurogroup. And yet, this redistribution would entail no international transfers and, correspondingly, would not hurt anyone’s national or political feelings.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Coordination or competition?

The coordination of fiscal stances would allow for demand-side, growth-friendly policies. It would return some political room for manoeuvre to national actors, as budgetary constrictions would cease to weigh so heavily on political choices. It would allow for a degree of coordination that would facilitate the kind of reciprocity and co-responsibility that the highly integrated and interconnected European market requires. Finally, it would contribute to the reduction of macroeconomic imbalances without overly challenging the shaky pro-European sentiments of national public opinion. On the other hand, it would require national policy-makers to forsake their obsession with trade surpluses and replace competition with cooperation. This would allow them to build a system in which, ideally, surpluses and deficits would be viewed as cyclical economic phenomena with no further existential meaning.

Gabriele de Angelis

Gabriele de Angelis is a political theorist working as a researcher at the Universidade Nova de Lisboa. His current research is focused on the reform of the economic governance in the European Union, especially with regard to normative aspects.

Home ・ Economy ・ Renewing Franco-German Axis: Challenges For Eurozone Reform

Most Popular Posts

schools,Sweden,Swedish,voucher,choice Sweden’s schools: Milton Friedman’s wet dreamLisa Pelling
world order,Russia,China,Europe,United States,US The coming world orderMarc Saxer
south working,remote work ‘South working’: the future of remote workAntonio Aloisi and Luisa Corazza
Russia,Putin,assets,oligarchs Seizing the assets of Russian oligarchsBranko Milanovic
Russians,support,war,Ukraine Why do Russians support the war against Ukraine?Svetlana Erpyleva

Most Recent Posts

Sakharov,nuclear,Khrushchev Unhappy birthday, Andrei SakharovNina L Khrushcheva
Gazprom,Putin,Nordstream,Putin,Schröder How the public loses out when politicians cash inKatharina Pistor
defence,europe,spending Ukraine and Europe’s defence spendingValerio Alfonso Bruno and Adriano Cozzolino
North Atlantic Treaty Organization,NATO,Ukraine The Ukraine war and NATO’s renewed credibilityPaul Rogers
transnational list,European constituency,European elections,European public sphere A European constituency for a European public sphereDomènec Ruiz Devesa

Other Social Europe Publications

The transatlantic relationship
Women and the coronavirus crisis
RE No. 12: Why No Economic Democracy in Sweden?
US election 2020
Corporate taxation in a globalised era

Foundation for European Progressive Studies Advertisement

EU Care Atlas: a new interactive data map showing how care deficits affect the gender earnings gap in the EU

Browse through the EU Care Atlas, a new interactive data map to help uncover what the statistics are often hiding: how care deficits directly feed into the gender earnings gap.

While attention is often focused on the gender pay gap (13%), the EU Care Atlas brings to light the more worrisome and complex picture of women’s economic inequalities. The pay gap is just one of three main elements that explain the overall earnings gap, which is estimated at 36.7%. The EU Care Atlas illustrates the urgent need to look beyond the pay gap and understand the interplay between the overall earnings gap and care imbalances.


BROWSE THROUGH THE MAP

Hans Böckler Stiftung Advertisement

Towards a new Minimum Wage Policy in Germany and Europe: WSI minimum wage report 2022

The past year has seen a much higher political profile for the issue of minimum wages, not only in Germany, which has seen fresh initiatives to tackle low pay, but also in those many other countries in Europe that have embarked on substantial and sustained increases in statutory minimum wages. One key benchmark in determining what should count as an adequate minimum wage is the threshold of 60 per cent of the median wage, a ratio that has also played a role in the European Commission's proposals for an EU-level policy on minimum wages. This year's WSI Minimum Wage Report highlights the feasibility of achieving minimum wages that meet this criterion, given the political will. And with an increase to 12 euro per hour planned for autumn 2022, Germany might now find itself promoted from laggard to minimum-wage trailblazer.


FREE DOWNLOAD

ETUI advertisement

Bilan social / Social policy in the EU: state of play 2021 and perspectives

The new edition of the Bilan social 2021, co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), reveals that while EU social policy-making took a blow in 2020, 2021 was guided by the re-emerging social aspirations of the European Commission and the launch of several important initiatives. Against the background of Covid-19, climate change and the debate on the future of Europe, the French presidency of the Council of the EU and the von der Leyen commission must now be closely scrutinised by EU citizens and social stakeholders.


AVAILABLE HERE

Eurofound advertisement

Living and working in Europe 2021

The Covid-19 pandemic continued to be a defining force in 2021, and Eurofound continued its work of examining and recording the many and diverse impacts across the EU. Living and working in Europe 2021 provides a snapshot of the changes to employment, work and living conditions in Europe. It also summarises the agency’s findings on issues such as gender equality in employment, wealth inequality and labour shortages. These will have a significant bearing on recovery from the pandemic, resilience in the face of the war in Ukraine and a successful transition to a green and digital future.


AVAILABLE HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us on social media

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube