Thursday 20 June 2019

Macron's enthusiasm is laudable - but a closer eurozone is currently a non-runner

French President Emmanuel Macron
French President Emmanuel Macron

Ferdinando Giugliano

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. Last week, in a newspaper interview, 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 EU. She also supports the idea of a small investment fund and some minor changes to the European Stability Mechanism, the eurozone's tool for bailing out countries.

Yet once you start digging a bit deeper, it's hard to have much hope for Mr Macron's dream.

Take the banking union. Since this ambitious project started during the sovereign debt crisis, there has been progress. But two things are missing. A credible backstop to make sure the fund doesn't run out of money. And a joint guarantee for deposits 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.

European leaders would like the ESM to take over the backstop role. It would certainly be more reassuring than the current structure, which relies on contributions from banks guaranteed by their national governments. But it was agreed in principle in 2013, and never implemented.

Moreover, there's still wrangling over how to govern the backstop. In theory, the Single Resolution Board 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 wouldn't work. Bank resolutions typically take a weekend to complete, and there's just no time to get so many people involved.

Meanwhile, as Mr Dombrovskis hints, progress on a joint deposit insurance scheme is unlikely.

So what of Ms Merkel's proposal for an investment fund? In theory, it would help crisis-hit countries maintain capital spending. But Ms Merkel said a fund would be in the "low double-digit" billions - 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 Mr Macron and Ms Merkel show some progress at least.

Indeed, despite Mr 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 Mr Dombrovskis.

All of this explains why Mr Macron may ultimately cave in to Ms Merkel's pragmatism. Spain and Italy, France's two natural allies in a bust-up with Ms Merkel, have new, politically fragile and untested governments.

Meanwhile, eight northern countries including the Netherlands and Ireland have advocated strict limits on new powers they want to hand to Brussels.

For all Mr Macron's laudable ambition, the time for a much closer eurozone is not now. (Bloomberg)

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