Unfortunately, his vision of Europe will have to come to terms with a difficult environment……
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Intesa Sanpaolo – Research Department For professional investors and advisers only
What does Emmanuel Macron, France’s new president, have in mind for Europe? And most importantly, what can he reasonably hope to achieve?
In the past few days, the question has been raised by the international press, which has started to speculate whether France will continue to pursue its traditional special relations with Germany, making do with the possibility of begging for a little extra flexibility on fiscal targets, as Macron’s predecessors did, or if it truly will press for a reform of European governance, as the new president promised to do before and during the election campaign. The starting point is very interesting. In a speech delivered in Germany in January, Macron laid out five pillars on which to rebuild the Union: defence, trade policies which include guarantees of fairness, sustainable growth, digital revolution, and relaunching of the monetary union; all of which integrated by reforms capable of curing the democratic deficit of the European Institutions.
For what concerns the monetary union, “the Euro is incomplete and cannot last without major reforms”. In addition to respecting the rules, “we need deeper solidarity”. Macron believes this may be achieved by creating euro area budget, supported by committed revenues and joint issuance of debt, and by introducing “common rules for fiscal and social matters” to counter fiscal dumping among member states. With the three main goals: financing the most crucial investments for the development of the area, guarantee emergency financial assistance through the ESM, and helping member states hit by major economic shocks.
What are the hopes that this manifesto may be adopted and implemented?
First of all, Macron must yet build a parliamentary majority, which will presumably require the formation of a coalition with the centre-right. This could force him to water down his pro-Europe stance. Second, any reform of the euro area must garner unanimous consensus, and must mandatorily be approved by all the major member states. The most important changes will require the signing of new treaties, or even a review of the Treaty on the EU itself. The situation is made more complicated by the simultaneous opening of the negotiations with the United Kingdom on Brexit, the nationalist drift in some Central-Eastern European countries, and the weakness of governments in Southern Europe. However, the biggest problem is the attitude taken by Germany. In Germany as well, there is awareness in some circles (the SPD, the Green Party, and part of the academic world) that a change in perspective is needed.
However, the government, public opinion, and the monetary authorities, are still well under the control of the custodians of orthodoxy, which produced the Fiscal Compact and imposed a deflationary bias on economic policies: these same figures still have an excellent chance of winning the September elections. Their solution to the problem of instability in the euro area is in fact, a non-solution: taking for granted that it is impossible to proceed towards completion of the union due to the lack of political consensus, they believe it is better to set the stage for a restructuring of debt, should fiscal discipline prove insufficient to prevent a crisis. And if this leads to higher refinancing costs for the weaker countries, all the better: there will be a stronger incentive to implement the reforms and guarantee fiscal discipline. Regardless of the fact that the underlying economic analysis may be reasonable, in our view, the problem with this strategy is that is proving politically unsustainable. Although this is not the only cause, outside Germany, the German economic agenda has weakened support for the monetary union and made the fortune of movements calling for the restoration of monetary sovereignty. In his speech, Macron borrowed and adapted the words of Jacques Delors to summarise his view: “for Europe we need a vision and a screwdriver. Unfortunately, we currently have a lot of screwdrivers but we are still lacking a vision”. Hard to say if governments will be able to agree on a shared vision of how the Eurozone must evolve, but we are certainly in urgent need of one.
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