Europe

German Support Unlocks Euro-Zone Change

Germany had been an obstacle to more fiscal integration in Europe. Not any more.

Proponents of euro-zone change.

Photographer: Steffi Loos

We may have no idea which shape the euro zone will take in the future, but we know one thing for sure: Any change to the structure of the currency union will need to be agreed to by Germany, the bloc's biggest economy and the largest contributor to the EU budget.

This simple fact makes the section on Europe in the draft coalition agreement between Germany's Christian Democratic Union (and its sister Christian Social Union) and the Social Democratic Party required reading. The overall impression is positive: Germany's largest parties seem keen to go further on the road to euro-zone integration than ever before.

To understand why, let's take a short step back into the recent past. Angela Merkel, who is seeking a fourth term as chancellor, spent much of the autumn negotiating a three-way deal with the Greens and the Free Democratic Party. The FDP, led by Christian Lindner, had drawn a red line at the idea that the euro zone should have a budget and vehemently opposed transfers across the currency union.

The talks collapsed, prompting Merkel to negotiate with the SPD's leader Martin Schulz, a committed federalist who has been president of the European Parliament. This was excellent news for anyone who believes the currency union has to move closer together in order to thrive: Germany made important concessions at the height of the sovereign debt crisis, for example agreeing to set up a euro-zone rescue fund (the European Stability Mechanism). However, in the last few years, Berlin has been resistant to further risk-sharing, insisting that governments should first reduce their budget deficits and prompt banks to clean up their balance sheets. A three-way deal with the FDP and the Greens would have meant more of the same.

The coalition position paper which was hammered out in the early hours of Friday is a quantum leap compared to Lindner's intention. It talks explicitly of the need to "emphasize specific budgetary resources for economic stabilization, social convergence and support for structural reforms in the euro zone." Furthermore, it envisages the possibility of setting up "an investment budget for the euro zone." It also opens the door to the European Parliament managing these funds, as well as taking control of the ESM: This would be taken away from the hands of governments and turned into a "European Monetary Fund."

The plan will be music to the ears of Emmanuel Macron. The French president has launched an ambitious program of euro-zone reform, which includes a European budget to fund European "common goods," the introduction of a European tax on financial transactions, and the harmonization of corporation tax across the euro zone to limit the scope for member states to undercut each other in order to attract companies. All these points are at least partially addressed in Germany's grand coalition blueprint.

It will also be welcomed by the European Commission, which has recently launched a roadmap for the future of the euro zone, including the creation of a "stabilization fund" to support countries in difficulty. When the commission's plan was first announced, it was unclear whether Berlin would ever support it. Were a German grand coalition to back at least some of these ideas, the euro zone could be moving closer to setting up some form of common fiscal policy, which is essential to help countries facing a sudden shock while the rest of the bloc is growing. The commission will also be delighted by the idea that parliament should take control over the ESM; this would reduce the role played by governments, as it was envisaged by commission president Jean-Claude Juncker. 

None of this means a more united euro zone is a done deal. For a start, all the parties involved need to actually agree to form a coalition. The SPD is having some internal problems, with its branch in Berlin rejecting the idea of a new deal with Merkel. The grand coalition will then have to make good on its promises, pushing for this plan in spite of domestic opposition from the likes of Lindner.

Finally, other euro-zone countries will have to be persuaded: In particular, the newly formed government is the Netherlands has made it clear it opposes the idea of fiscal transfers across the union. A group of German and French economists released a 25-page paper on Wednesday calling for EU countries to bridge their differences and draw lessons from the euro-zone crisis. But getting politicians to agree may even be harder than getting economists to agree.

Still, any plans such as the ones that are being discussed in Berlin right now were anathema only a few months ago. In the absence of German opposition, the project of euro-zone institutional reform can finally commence.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Ferdinando Giugliano at fgiugliano@bloomberg.net

    To contact the editor responsible for this story:
    Therese Raphael at traphael4@bloomberg.net

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