Emmanuel Macron’s dream is out of reach
The French president wants a more federalist Europe; however, the time for a much closer eurozone is not now
European leaders will meet in Brussels at the end of June to discuss how much deeper to push the eurozone’s monetary union. While there’s been plenty of hype about the summit, it risks being a disappointment. Most of it will just confirm what’s already been agreed. And, in typical European fashion, many big questions will remain unresolved—until the next crisis makes them unavoidable.
French President Emmanuel Macron wants a more federalist Europe, including a European treasury and a eurozone finance minister. Last week, German chancellor Angela Merkel gave her most detailed response yet. She pays lip service to strengthening the so-called “banking union”, which has transferred power over banks from member states to the European Union (EU). She also supports the idea of a small investment fund and some minor changes to the European Stability Mechanism (ESM), the eurozone’s tool for bailing out countries.
Yet once you start digging a bit deeper, it’s hard to have much hope for Macron’s dream.
Take the banking union. Since this ambitious project started during the sovereign debt crisis, there has been progress. The European Central Bank (ECB) has acquired sweeping powers over the bloc’s largest lenders, while a new agency—the Single Resolution Board (SRB)—has been handed the ability to wind down big banks and a €55 billion pot of money to pay the cost of doing that (the Single Resolution Fund.) But two things are missing. First, a credible backstop to make sure the fund doesn’t run out of money. And second, a joint eurozone guarantee for deposits up to €100,000 to stop people moving their money to other countries during a crisis.
In an interview in Brussels, Valdis Dombrovskis, the European Commission vice-president in charge of monetary affairs, told me he was more hopeful on the first point than the second. “On the European Deposit Insurance Scheme, I could imagine a beginning of political discussions, but it will depend exactly on how the summit will go,” he said, adding that he expected “agreement on the backstop”.
European leaders would like the ESM to take that backstop role. It would be more reassuring than the current structure, which relies on contributions from banks guaranteed by their national governments. But even though it was agreed in principle back in 2013 that the ESM should do this, it’s never been implemented.
Moreover, there’s still wrangling over how to govern the backstop. In theory, the SRB should be able to get the money by simply phoning the head of the ESM. In practice, it might not be so simple. For example, it may need the approval of some national parliaments such as Germany’s Bundestag. That would make the procedure impossible. Bank resolutions typically take a weekend to complete, and there’s just no time to get so many people involved.
Meanwhile, progress on a joint deposit insurance scheme is unlikely. The commission has put forward several schemes, including a very good proposal in 2015 that’s been watered down since. While the ECB has championed this project, Germany is stridently opposed. It worries that taxpayers would have to repeatedly support depositors in weaker member states. Without any progress, the credibility of a genuine banking union will be dented further.
So what of Merkel’s proposal for an investment fund? In theory, it would help crisis-hit countries maintain capital spending. The European Commission has made a similar pitch in the past, saying that only countries that respect the fiscal rules will be able to access the money. The fund would give out loans, which member states would repay once the crisis is past.
Optimists would see this as the first evidence of European states finally putting resources together to routinely help countries in need—a baby step toward Macron’s European treasury. However, Merkel said the fund would be in the “low double-digit” billions—and that’s too small to matter. Nor should we expect it to grow. For years, the EU’s budget has been destined to increase but members have struggled to keep it at the same level. So the fund will be no more than a political gesture, designed to let Macron and Merkel show some progress at least.
Indeed, despite Macron’s idealism, the biggest problem facing the eurozone is not how to move forward, but how not to regress. Italy’s new populist government wants to relax the eurozone “bail-in” rules that are a cornerstone of the banking union. The League and Five Star’s spending plans would also torpedo the currency union’s fiscal limits. That strengthens Germany’s resistance to closer ties. “Risk-sharing and risk reduction must go hand in hand,” says Dombrovskis.
All of this explains why Macron may ultimately cave in to Merkel’s pragmatism. Spain and Italy, France’s two natural allies in a bust-up with Merkel, have new, politically fragile and untested governments. They’re unlikely to be much help in corralling support for more ambitious reform. Meanwhile, eight northern countries, including the Netherlands and Ireland, have advocated strict limits on new powers they want to hand to Brussels.
For all Macron’s laudable ambition, the time for a much closer eurozone is not now. Bloomberg View
Ferdinando Giugliano writes columns and editorials on European economics for Bloomberg View. Comments are welcome at firstname.lastname@example.org.
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