The Big Read European Union

European leaders aim to seize the moment for reform

But with Angela Merkel weakened despite her election victory, a new grand bargain for the eurozone will be more
complicated

YESTERDAY by Jim Brunsden and Mehreen Khan in Brussels, and Stefan Wagstyl in Berlin

European leaders had billed it as their window of opportunity. Angela Merkels victory
in the German federal election this weekend was supposed to re the starting gun on the
most ambitious negotiation of eurozone reforms since the Maastricht treaty was signed
in 1992.

EU leaders, led by French president Emmanuel Macron, had been preparing to capitalise
on Ms Merkels renewed mandate to deepen euro integration at a time when the bloc is
enjoying an unexpectedly bouncy economic recovery.

Donald Tusk, president of the European Council, has set things in motion by convening a
euro summit of EU political leaders in December. Mr Tusk wants governments to take
concrete decisions on reforms by June.

Instead, the results of the German elections mean that Ms Merkels nal term in oce,
where she will preside over a weakened party base and will need to manage the
competing agendas of her coalition partners, is likely to complicate a reform debate
already riven with ideological divisions.

Sceptics in the chancellors Christian Democrat-led bloc could seize on the election result
to reinforce their opposition to anything that might lead to bigger nancial risks for
German taxpayers. The likely presence in the coalition of the revived liberal Free
Democrats, which are fundamentally opposed to some of the ideas being pushed by Paris
for further euro integration, will further constrain her room for manoeuvre on a Franco-
German grand bargain.

Big ideas 1. Euro area nance minister

 A nance minister would be part of the french push for more centralised economic management Reuters

The idea of a nance minister for the euro goes back to the 1970s and has been revived by
Emmanuel Macron with the backing of Brussels. It makes up a big part of the classical French
push to have more centralised economic management in the eurozone. The European
Commissions idea for the role is that it would combine two existing jobs: that of eurogroup
president, the person who chairs meetings of euro area nance ministers, and that of EU
economy commissioner, a role that involves upholding EU budget rules.
The French president has yet to set out his plan for the specics of how the role would work.

Ms Merkel also has to contend with Alternative for Germany, the far-right party set to be
the third-largest in parliament, which wants weaker countries out of the eurozone and
has already made noises about opening a parliamentary investigation into alleged
breaches of German law carried out under the reign of the chancellor.

None of this is set to deter Mr Macron: elected on a mandate to deepen and complete
economic and monetary union, he will on Tuesday lay out his vision to reinforce the
single currency in his rst major speech on the EU since his May victory. He intends to
give Ms Merkel and her potential coalition partners a clear idea of what Paris wants
before what could be months of negotiations in Berlin to build a governing majority.

After six years in crisis mode, governments acknowledge the eurozones incomplete
foundations will need strengthening if the bloc is to survive another downturn. The
sovereign debt crisis exposed the limits of the single currencys armoury, forcing the
European Central Bank to reassure markets that no country would ever be allowed to
crash out of the euro and then unleash more than 1.6tn in asset purchases to rescue the
economy from stagnation.
There is no silver bullet to complete economic and monetary union once and for all, Mr
Tusk wrote to EU leaders last week. But I am convinced that we have the obligation to
improve the functioning of the EMU and strengthen it step by step.

Mr Macrons arrival at the lysee palace has placed the Franco-German axis at the heart
of new efforts to reform euro area governance. Optimists are hoping that Ms Merkel,
whose chancellorship will run to 16 years should she complete her new term, will use
her nal years in oce to carve out a legacy on the euro that goes beyond muddling
through with emergency measures forged in the teeth of economic crises.

We will not have this chance again for years and years, says one senior Brussels
ocial, referring to a slowdown in the cycle of national elections.

But even with an energetic, pro-European Mr Macron at the table, overcoming the
perennial struggle between the French and German visions for the euro will be the
toughest European task facing the rookie president and the veteran chancellor,
especially with Ms Merkel weakened in Berlin. And the political calculus is far more
complex than just a battle between the two. It involves 19 countries and ultimately the
future direction of 27 EU member states.

We should use this window of political and economic opportunity, Valdis Dombrovskis,
the EU commission vice-president responsible for the euro, told the FT. It is better than
waiting for a new crisis to complete the work.
 Big ideas 2. European Monetary Fund

The ECB and Commission currently oversee bailout programmes and the issuance of debt Bloomberg

Much like the euro area nance minister, there is no single idea for what a European Monetary
Fund would do. The German vision of the EMF would transform the functions of the European
Stability Mechanism by issuing debt and designing and monitoring tough bailout programmes
a role currently carried out by the European Commission with support from the European
Central Bank.
The most ambitious version of the German plan is for the EMF to oversee national budgets,
another role it would wrest from the commission. Brussels will be staunchly opposed to such a
shift, which may also require reopening the EUs treaties.
German support for the EMF is a reection of both bailout fatigue and frustration at the
amount of political discretion used by the EU in applying euro area budget rules. This is a
concern that goes back to the euro areas original sin, when both Paris and Berlin broke
spending rules in the early 2000s but faced no punishment.

The talks will be the latest attempt to x gaps in the architecture of a single currency
whose foundations have often been tested to the limit in the face of competing economic
orthodoxies.

Germany proclaims the importance of market discipline, though in practice Berlin comes
to the rescue more often than in a really free market. France is more comfortable with
an all-powerful state which has discretion to act in any way it sees t. This uneasy
marriage, always latent in the structures of the euro, was exacerbated in the crisis years
when budget and bailout rules predominated and scal policy harmed rather than
helped recovery.
Such things dont go away overnight, but people are more aware of each others
thinking than before, says Markus Brunnermeier, an economics professor at Princeton
University.

Each side has allies in an old European struggle that predates the euro. One senior
policymaker describes it as a proto-theological battle between the Calvinist north led
by Germany, Finland and the Netherlands, and a Catholic south of France, Italy and
Spain.

In any grand bargain, Mr Macron will have to persuade the Calvinists they will not be on
the hook for the proigacy of other countries in a reinforced eurozone. Ms Merkel will
need to reassure the Catholics that the age of austerity will not return should another
crisis hit.

There is also an awkward squad of countries outside the euro that includes Sweden,
Poland and Hungary. Part of the reform agenda will require changes to EU law that must
be discussed by all 28 members including the UK, giving a say to capitals that have
clashed with Brussels, such as Budapest and Warsaw.

Whatever the outcome of her coalition talks, Ms Merkel has kept a characteristic
coolness in the face of a blitz of ideas coming from Paris. She has said Mr Macrons idea
of a eurozone nance minister is not bad, arguing the role would help provide
greater coherence to the single-currency area.
Her views of a possible eurozone-wide budget are less ambitious than those of the
French president she has evoked the idea of a budget made up of small
contributions rather than hundreds of billions of euros. This money could focus on
providing support in regions with high unemployment, or on investments in digital
technology, but not on wider nancial safety nets.

This clashes with Mr Macrons dream of a large budget, worth several percentage points
of the blocs gross domestic product, to help member states ride out recessionary storms.
The liberal FDP is also staunchly opposed to Pariss ambitions in this area.

For all the competing priorities, EU ocials believe there is a scope to reach a deal, not
least because almost every member of the euro including Germany has gripes
about the status quo.

Vitor Constancio, left, vice-president of the European Central Bank, and Valdis Dombrovskis, vice-president of the European Commission
Bloomberg
The list of issues for Germany is long: complaints over lax enforcement of budget rules;
anxiety that the ECB has assumed an outsized role in crisis-ghting; and frustration that
private sector creditors do not take more of a hit in bailouts. If it wants progress in these
areas, Berlin will have to give way on others.

In the next six months, what we need is to have a political agenda agreed, Luis de
Guindos, the Spanish economy minister, told the FT, adding that governments would
strive to avoid any move that could lead to a messy reopening of the EUs treaties.

The eurozone budget is likely to be a major litmus test, said one senior diplomat. In one
corner, France is joined by a number of southern allies, as well as the Portuguese vice-
president of the European Central Bank, Vtor Constncio. But in Berlin, according to a
diplomat, talk of a big pot of EU funds for slowdowns smacks of taking responsibility for
others and their mistakes.

Germanys focus is on the creation of a European Monetary Fund, essentially an upgrade

of the euro areas existing agency for handling sovereign bailouts. Mr Macron has given
his backing to an EMF, but said it should not be confused with his euro area budget
plans.

Big ideas 3 Euro area budget

French farmers join a nationwide strike to call for nancial protection during the 2009 nancial crisis AFP

The budget is a key part of Mr Macrons aim to future-proof the eurozone for the next crisis. It
would be a common pot of money dished out to countries in recessions. Paris wants a budget
worth several percentage points of gross domestic product (the current EU budget amounts to
1 per cent of the unions GDP), which would be built up over several years.
The commission, which wants to avoid the creation of a euro area budget outside the control of
the EUs institutions, is backing a compromise plan where a eurozone only budget line would be
established within the wider EU budget.

In a bid to put its own stamp on the talks, the European Commission will propose a
major policy package before the December euro summit in Brussels, including a draft
law to create the EMF, and a policy paper on how to set up a euro area compartment
within the EU budget. EU ocials also see an opportunity to make headway on proposals
such as completing the euro areas banking union a project to centralise oversight and
crisis management of banks before moving on to grander designs.
In his speech on Tuesday, Mr Macron will also tout the notion of a transition period of
over ve to 10 years for the full establishment of a euro-area budget, according to one
adviser.

Whether Germany is willing to play ball will depend rst on Mr Macrons ability to
deliver on commitments to honour EU scal rules and lift France out of a low-growth
slump. A scally sound France would make it easier for Ms Merkel to convince a
sceptical German public that she is striking deals with a reliable partner.

Seasoned observers of EMU dynamics warn that old grievances are still deeply felt,
however. Germans still fear that they risk paying for everyone else, while others point to
the huge benets the country has reaped from the eurozone. An often-heard refrain of
southern European politicians and in Washington is that German exporters have
beneted heavily from an articially low exchange rate.

Germany is still trapped in the narrative of the crisis a narrative that it is the
Germans who have been paying for everyone else, says a former eurozone central
banker who sat on the ECBs governing council in the depths of the debt crisis. It will be
very dicult for Merkel to escape this trap and convince her public. She just wont be
believable.

Economists too have tempered their expectations for what projects like a euro area
budget or an EMF can achieve. Although any new backstops will help balance the
lopsided structures of the euro, their limited scope and size will mean that the same
medicine will have to be swallowed by weaker countries when a recession hits. For the
likes of Spain, Portugal and Greece this has been a mix of painful wage cuts and
redundancies to help industries compete with German business. It is these complaints
that fuel the insecurities which Eurosceptic populists have exploited from Italy to
Finland.

Even with Germanys new and complicated electoral map, European policymakers argue
the political weathervane has shifted from survival to recovery and provided a fertile
period to achieve progress on measures that will benet the euros citizens.

Additional reporting by Michael Stothard in Madrid, Anne-Sylvaine Chassany in Paris and

Claire Jones in Frankfurt

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