Emmanuel Macron, France’s newly minted President, has put himself forward as a visionary leader for Europe.
His focus is “horizons” not “red lines”, and in the past few months he has sparked a discussion of what Europe stands for, and how it could be made to work better.
On 26 September, in an ambitious speech at the Paris-Sorbonne University, Macron laid out his vision for Europe.
His wish list includes a European defence budget, an asylum authority, and common approach to development aid, digital innovation and environmental efforts. These are all EU-level ideas. Many have been around for a while, and some enjoy widespread support already.
But Macron also has plans for Eurozone reform. These include a Eurozone budget (equal to several percentage points of the bloc’s GDP), a finance minister, an IMF for the Eurozone called a European Monetary Fund (EMF), and risk pooling for new debt.
These proposals got little airtime or applause last week.
The reason for this is that they are much more controversial. They are particularly contentious in Germany, where public opinion and the default political position are firmly against measures that might increase risk-sharing or fiscal transfers within the single-currency area.
Such issues are all the more sensitive as coalition negotiations begin. The liberal Free Democratic Party – which strongly opposes risk sharing within the bloc – is almost certain to enter government as part of Angela Merkel’s coalition.
Macron’s ideas for Eurozone reform are not only politically infeasible in the current climate. They are also unnecessary.
Several developments since the global financial crisis have strengthened the resilience of the Eurozone in the face of potential shocks. The most important is intervention by the European Central Bank (ECB).
Mario Draghi’s commitment to do “whatever it takes” to preserve the euro reduced the risk of contagion, and the ECB’s stimulus programme created fiscal breathing space for governments by pushing down yields.
European policymakers also established crisis management tools, such as the European Stability Mechanism (ESM). This is a permanent fund with a lending capacity of up to €500bn, financed by the member states, which can be used to support any member state hit by an asymmetric shock.
The EU banking union, meanwhile, has improved how banking crises are dealt with.
A single supervisory mechanism at the ECB has advanced oversight of systemically important financial institutions. And the “bail-in” principle – whereby junior creditors’ claims on a bank are cut before a government bail-out is considered – has weakened the “doom loop” between sovereigns and banks, whereby shocks are transferred from one to the other.
Finally, structural reforms have been carried out in a number of countries – Spain and Portugal in particular – resulting in supply-side improvements.
All these factors have strengthened investor confidence in the Eurozone, and contributed to the current uptick in growth across the bloc.
There is still unfinished business, of course. Italy and Greece face further reform challenges. The euro is still vulnerable to political threats. The banking union remains incomplete: not all countries have agreed to the common deposit insurance scheme, and some policymakers have been hesitant to apply the bail-in rules.
But would Macron’s ambitious plans for fiscal integration make the Eurozone better able to respond to shocks?
In the event of a shock hitting all or most of the member states, shared fiscal capacity would barely make a difference. Would it help to spread growth more evenly? Transfers from richer to poorer states already exist in the form of the EU budget.
Improving the existing crisis management tools could, however, achieve Macron’s goals of a stronger and more stable Eurozone.
An expanded ESM could play the role that Mr Macron envisages for the EMF. Shared unemployment insurance, financed by a fund into which member states pay during good times, could act as an automatic stabiliser for the Eurozone.
Other improvements might include finalising the common deposit insurance, ensuring the bail-in principle is applied, deepening capital markets, and expanding EU-level fiscal capacity.
Not only would these be more manageable (as they involve extending existing structures rather than inventing new ones), and less controversial, particularly in Germany – but they would be just as effective.
Macron’s reform agenda is an attempt to provide a positive vision for Europe. However, as long as populism remains potent, Europe’s leaders will be wary of embracing reforms that would further erode national sovereignty.
That means that the French President’s plans to strengthen the EU’s borders, security and defence will get a hearing, but a substantial Eurozone budget is a non-starter.