EU-phoria & Macron-mania: A Global Equation

7 juillet 2017
Bouts of market optimism are rarely named after French presidents, but we live in unusual times. In financial jargon, “Macron” seems to refer to a long-awaited political process by which the Euro zone’s flaws are expected to be fixed once and for all, by means of a political leap towards federalism. Although this hope has failed to translate into a stock market rally so far, many comments seem to follow the same kind of logic as the one that played out when Mario Draghi rocked the ECB’s deathly status quo, in 2012. The political process currently at play is of a clearly different nature however.

Reports suggesting the imminence of a Franco-German grand economic plan for Europe are inaccurate, but they are interesting in what they say about the political anxiety created by populism. There is some piquant irony in the rosy picture of EU politics that many British and American media outlets have been painting since the French election. Until recently, a bleak view of the euro was the norm, and the scenario of an EU collapse was even gaining traction. This sudden shift might point to the depth of the domestic divide over Brexit and Donald Trump’s presidency respectively, more than to a true change of heart about the EU.

The ongoing tensions between Angela Merkel and Donald Trump go beyond the latter’s disturbing rhetoric or his controversial decision to withdraw the United States (US) from the Paris climate agreement. They include different interests in terms of international trade — an issue which began to be raised long before Trump stepped in. The reduction of this debate to a moral opposition between free trade and protectionism is somewhat simplistic. The German Chancellor herself is developing an increasingly defensive stance, not so much in terms of trade of course – since her country enjoys a current account surplus close to 9 percent of GDP -, as in terms of strategic investments.

As Germany has become somewhat disillusioned with China, Merkel recently warned that “Seen from Beijing, Europe is an Asian peninsula.”[i] She made clear that she intends to have a say over Chinese investments in Germany, after the outcry sparked by Midea’s acquisition of Germany’s iconic robot manufacturer KUKA last year. Meanwhile, a German-Chinese partnership has been presented by many commentators as an alternative to US leadership, ahead of the G20 meeting in Hamburg. As with European issues, the questioning of the US global role often comes with a great deal of confusion.

The hope for a strong Franco-German push towards European federalism seems to be part of this global equation. Macron is taking account of Germany’s reassessment of its global and European role. At the latest EU summit in Brussels, he championed the notion of a “protective Europe,” which of course is music to French ears. Meanwhile, he cautiously focused on issues that are of concern to Germany too: anti-dumping, the overhaul of Chinese investments, posted workers from central Europe. These issues antagonized several EU member states, especially central European ones and northern Europe’s smaller open economies which have no interest in such restrictions. While Macron begins to challenge the European status quo, he clearly avoids confronting his German counterpart, especially when it comes to the country’s macro-economic coordination with its neighbours, whether in terms of labour costs, fiscal policy or public investments.

Given the long-term taboos affecting European politics, this configuration is unlikely to produce the tremendous progress expected by the consensus in the foreseeable future. In July 2012, Mario Draghi’s show of force, although rhetorical too, did have concrete and immediate technical implications, as the implicit pressure exerted on long-term interest rates helped crisis-hit governments to stay afloat financially, without having to restore their monetary sovereignty. The anticipation of the purchase programme that materialized in 2015 sparked an impressive depreciation of the euro in 2014, which, along with a massive flow of liquidity, set the stage for today’s rather comforting growth figures. While Macron’s election has been seen as a momentous step on the political side of the normalization process initiated by Draghi, its actual impact remains to be seen.

Macron’s presidency has got off to an impressive diplomatic start, and there is no doubt that his election has been seen very positively in Berlin in particular. Although Macron and “Merkel IV” could agree on significant steps, like the constitution of a joint budget for the Euro zone, these innovations will probably be of a rather symbolic order. Unsurprisingly, the issue of massive fiscal transfers and debt pooling remains anathema to most German politicians and, even more crucially, to the general public, whose opposition has grown even stronger in recent years.

On the banking union front, the Italian government’s recent decision to wind down two banks of the Veneto region for a total cost of up to €17 billion in public money, without tapping senior bondholders, has been promptly interpreted by many German commentators as a breach of Europe’s so-called “bail-in” rules. These rules, which are supposed to protect taxpayer money from bank failures, would turn out to be very beneficial on the long term, since they might lead investors to take more responsibility for souring debts. Meanwhile, there seems to be little consideration for the fact that they are inapplicable on the short term. Against this background, the Euro zone’s unresolved banking crisis adds to Germany’s fears over a joint deposit insurance mechanism, the cornerstone of a genuine banking union.

Some strikingly positive comments have been coming out of Germany since Macron’s election, but their scope for Europe tends to be greatly exaggerated. Most of those comments were meant to cheer the election of an energetic pro-EU leader, whose stance appears to be in synchronisation with the German government’s views, so far…  Despite the likelihood of symbolically significant concessions, these comments are far from signalling a willingness to embark on a new type of massive and systematic transfers or risk-sharing arrangements. Quite the contrary, defiance seems to be rising on that front.

Macron is expected to make good on his promised overhaul of France’s labour market, in line with the reforms carried out throughout the Euro zone over the past fifteen years, starting with Germany’s Hartz reforms in the early 2000s. This is, however, unlikely either to unleash a wave of institutional breakthroughs or to rebalance the European economy, which, despite its recovering growth rates, remains trapped in a widespread race to the bottom. Euphoria is of little help in the face of hard choices.

[i] “Merkel warnt vor expansivem China: ‚Peking sieht Europa eher als asiatische Halbinsel‘”, Wirtschaftswoche, 29 June 2017,
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