Euro imbalances: « Merkron » Might Differ from « Merkozy »

This Thursday, Emmanuel Macron received Angela Merkel; they notably talked about economic issues. The point of view of Rémi Bourgeot, associate research fellow at IRIS.

Macron has called on Berlin to “move forward and help to fix a dysfunctional euro zone.” Is Germany really benefitting from the currency union’s flaws, as Macron suggested?

There is some novelty in Macron’s statement. He had not stressed the issue of the euro zone’s real imbalances, and Germany’s huge trade surplus in particular, since he was economy minister. At that time, he talked about the existential risks facing the euro zone. Since he was elected, and especially at the latest EU summit in June, he only raised issues that were of concern to Germany too, in order to reach a consensus.

Germany is benefiting from the euro zone, as it has been able to increase its trade surplus endlessly, and suppress domestic unemployment without facing any kind of exchange rate adjustment within the euro zone, by definition.

What Macron means is that Germany has not accepted major concessions in terms of solidarity and transfers in return for this commercial advantage. Since the euro crisis, many commentators have argued that more systematic transfers, sometimes even debt pooling, should be put in place, as well as a genuine banking union, to make for these imbalances before they translate into an economic or financial crisis again.

Macron seems to take a more incisive tone, in a context less formal than large EU meetings. He might be wary that embracing the European status quo, with only limited institutional advances, would eventually undermine his presidency. In brief, he might be seeking to escape his predecessors’ fate. If there is such a thing as “Merkron”, the French president will not want this partnership to resemble what many called “Merkozy”.

What economic roadmap could the EU follow under a Franco-German impulse?

On the institutional front, the main step consists in increasing financial transfers to make for the loss of competitiveness that Germany’s partners are facing as a result of the euro. Macron has ditched the idea of pooling national debts, a major taboo in Germany. Instead, he promotes the notion of a joint budget for the euro zone and completing the banking union, with a common deposit insurance mechanism in particular. Ahead of the Franco-German cabinet meeting, he also advocated concrete and more accessible steps like the creation of joint investment funds, especially in favour of IT and nanotechnologies.

Macroeconomic coordination is another major issue. Germany’s budgetary and labour policies do not take account of the euro zone’s economic equation, its trade imbalances in particular, which leads many to blame the country for having a mercantilist approach to trade. Macron therefore begins to address that issue, as Donald Trump does, with a very different style of course.

The European Union suffers from the absence of any true coordination in terms of macro-economic policies. The only type of coordination since the crisis has resulted in a race to the bottom in terms of labours costs, which weighs on aggregate demand. Despite the ECB’s tremendous support, with huge liquidity injections and the euro’s depreciation, today’s situation is akin to the logic of the gold standard.

Is Berlin ready to embark on a new economic vision?

Germany’s economic taboos reveal difficulties of a political nature, when it comes to its European commitment. Berlin’s official speech adheres to a profoundly pro-European – even federalist – approach; but in reality, debt pooling or the risk sharing associated with a genuine banking union are unconceivable. Germany’s concessions on these issues are likely to be of a symbolic nature. For instance, Angela Merkel has signalled that she might be willing to accept the idea of a joint euro zone budget, even if this means infuriating the more Eurosceptic members within her own camp. This budget would however have to be of a very limited order, with little macro-economic impact. Germany sticks to a national approach of economic policy, which is not conducive to a rebalancing of the euro zone.

There will be no advances before the federal election, of course. Afterwards, if Merkel wins by a comfortable margin or builds a solid coalition, she might consider that she has a sufficient mandate to impose institutional concessions in favour of Europe. Taboos will remain omnipresent however, and the Chancellor’s room for manoeuvre limited, as a result of the internal balance within her party. This might lead Macron and other European leaders to focus more on macroeconomic coordination, which actually plays the most important part in preventing devastating crises.