Eyes on euro fighter Macron

Not for the first time in recent years, Greece’s fate is being decided outside of its borders. Representatives of the country’s lenders, in the formation known as the Washington Group, met at the sidelines of the G7 summit in Bari, Italy, to discuss debt relief. The next milestone in this crucial discussion will be at the May 22 Eurogroup in Brussels.

However, as vital as a settlement on restructuring Greek debt is, another discussion has just begun abroad that could prove even more decisive for the country’s future.

German Chancellor Angela Merkel is due to host Emmanuel Macron in Berlin on Monday in the first meeting between the two politicians since the latter secured an impressive victory in the French presidential elections. The meeting will give us a first taste of how their relationship might evolve.

The nature of their association is likely to act as a metronome for the rest of the eurozone, including its most vulnerable member – Greece. The balance between Germany and France has always been a decisive factor in the direction Europe takes. The Schuman Declaration, signed 67 years ago this month, laid the foundations for the creation of the European Union. Its primary aim was to make another war between France and Germany “not merely unthinkable, but materially impossible.”

When West Germany and East Germany reunified in 1990, France pushed for the Deutschmark to be abandoned in favor of a common European currency. “[Francois] Mitterrand did not want any reunification without progress on European integration,” Hubert Vedrine, an adviser to the French president at the time, told Der Spiegel magazine a few years ago. “And the only ground that was prepared for that was the currency.”

In this anxious effort to strike a balance, though, the eurozone’s monetary policy was styled along the lines of the one employed by Germany’s central bank, the Bundesbank, which later proved to be one of the single currency’s significant weaknesses.

The recent history of the euro has also been dominated by the Franco-German relationship. One of the key moments came in October 2010, when Merkel and then French President Nicolas Sarkozy agreed at the Normandy resort of Deauville that, in the wake of the eurozone’s first loan package for Greece, future sovereign bailouts would require losses to be imposed on private creditors. The decision, which took other leaders by surprise, was blamed by the International Monetary Fund for complicating the Greek situation, while others felt that it sparked a rise in bond yields that precipitated bailouts in other eurozone periphery countries and appeared to leave Italy teetering on the edge.

Now, Macron has taken over from Francois Hollande hoping to reform not just his own country but the euro as well. “We must collectively recognize that the euro is incomplete and cannot last without major reforms,” he said during a speech at Humboldt University in Berlin this January. “It has not provided Europe with a full international sovereignty against the dollar on its rules, it has not provided Europe with a natural convergence between the different member-states.”

The centrist politician warned that without reform the euro may be obsolete in 10 years. He has proposed a series of changes to improve the single currency, with the centerpiece being a budget for the eurozone that will be monitored by the European Parliament and backed by borrowing capacity so that it can finance investments, provide emergency loans via the European Stability Mechanism and help eurozone members if they suffer significant economic shocks.

“The establishment of this budget will have to come with a convergence agenda for the eurozone, an anti-dumping agenda that will set common rules for fiscal and social matters,” added Macron in a message to his German hosts that proceeded to become clearer during his speech.

“In a monetary union, a country’s success cannot be sustainably achieved to the detriment of another, which is a limit of the competitiveness approach, because competitiveness is always about comparing yourself with a neighbor,” he said. “The difficulties of one are always the problems of all.”

Although Macron admits that France must carry out its own labor, market and education reforms and respect fiscal targets, his words are a direct attempt to overturn the logic and policy that has dictated the eurozone’s response to its crises since 2010 and to shape how its overall approach will evolve from this point onward.

In doing so, Macron is taking the fight to Germany, which previous French presidents failed to do. “When you look at the situation, the dysfunctioning of the euro is good news for Germany, I have to say. You benefit from this dysfunctioning,” he told his audience in Berlin. “[The] euro today is a sort of weak Deutschmark, which favors the German industry,” he added.

These are views that have rarely been aired publicly by key players in the eurozone and it is little surprise that the initial response from Berlin was to suggest that Macron has enough on his plate at home to be focusing on euro reform. “German support cannot replace French policymaking,” was Merkel’s first comment on the subject after Macron comfortably won last Sunday’s vote in France.

Merkel’s domestic opponents and coalition partners, the Social Democrats (SPD), who are trailing her CDU party ahead of the September federal elections, are more enthusiastic about Macron’s approach. Social Democrat Foreign Minister Sigmar Gabriel suggested that the time has come to end “financial policy orthodoxy” in the eurozone.

However, in the buildup to the German election later this year, it is unrealistic to expect Merkel to give any ground to Macron as far as eurozone policy is concerned. A day after the French politician was elected, the front page of Germany’s best-selling tabloid newspaper ran with the headline “How expensive will Macron be for us?” This is not an atmosphere in which there can be bold departures.

Perhaps after Germans have cast their ballots there may be an opportunity to discuss changes. Of course by then Macron could be bogged down in his domestic reform push, which will come with its own difficulties. For now, Greece and others will just have to stand back, watch and wonder, while remembering the line in the Schuman Declaration that said: “Europe will not be made all at once, or according to a single plan.”