Emmanuel Macron, France’s new president, wants to give fresh impetus to EMU by establishing a common budget, though only to finance policies that are currently being dealt with elsewhere.
Macron’s only new proposals are to create the post of finance minister and a euro zone parliament, which would lead to further centralisation of EMU.
Nonetheless, German Chancellor Angela Merkel will make an effort to accommodate Macron so that some of his ideas will, eventually, become reality.
But for some time to come, the ECB will have to do the heavy lifting to keep the monetary union intact.
Macron calls for redistribution and common debt
Macron’s proposals for further euro zone integration are not sledgehammer politics.
He has craftily put together a hodgepodge of measures with the goal of seeking supporters and avoiding confrontation.
For that reason, Macron has put little flesh on the bones of these proposals.
Macron’s election manifesto played up the idea of a budget for the euro zone.
The budget would be managed by an economics and finance minister who would report to a future euro zone parliament. Macron would use the budget to finance three priorities:
1) what he calls “investment into the future”,
2) aid for countries in financial distress, and
3) measures to combat recessions.
Since financial and economic crises tend to vary in their impact on individual euro zone countries, Macron’s programme is implicitly redistributive.
In presenting his programme on 2 March, Macron said one source of funding for the euro zone budget would be mutual debt. Debt mutualisation is evidently one of the things on Macron’s mind, even if he has ruled that out for existing debt.
There is some protectionist decoration to Macron’s overall plan, such as controls on foreign investment purportedly to protect domestic industries. Macron also wants stronger EU defences against what he sees as unfair trading practices by other countries.
Euro budget wouldn’t finance new policies
Stability in a monetary union depends on the individual member states maintaining stable economies and healthy government finances. The euro zone’s Stability and Growth Pact sought to achieve that via fiscal rules which allowed countries to operate at their own responsibility as long as they abided by the rulebook.
The Pact malfunctioned because member states softened it even before EMU got under way and a policymaking vacuum ensued. In order to fill it, a number of observers proposed a completely different setup: common economic and fiscal policies for the euro zone, including joint debt issuance.
The idea was to attach a fiscal union to the monetary union.
Macron’s proposals go in the same direction. But he would use a euro zone budget to finance policies that are already being managed by other EU institutions or national governments:
- Rescue fund already exists: One of the three stated purposes of the euro zone budget is to provide aid for countries in financial distress. But the ESM rescue fund already exists to do just that, with a lending capacity of 500 billion euros. The ESM, of course, only lends to countries that meet strict economic conditionality, something that goes unmentioned in Macron’s proposal.
- Investment subsidies already exist. The second use of a euro zone budget would be to finance what is billed as investment into the future. However, the EU’s Cohesion Fund already promotes investment on a large scale. It can draw on 53bn euros annually through to 2020, equal to 0.4% of EU GDP. What is more, Macron has not explained why these projects have to be managed at the euro zone level. Currently, even cross-border road and rail connections can easily be built with national governments taking the lead (in any case, the routes would have to be agreed upon jointly).
- National governments already (try to) combat economic crises. The third reason for a euro zone budget would be to combat economic crises. But the question is why it would have to be undertaken at the euro zone level when national governments already have sufficient policy tools. Moreover, the effectiveness of fiscal stimulus can be questioned.
Experience shows that budget decisions take too long to be effective in countering sudden recessions.
All in all, Macron wants to use a euro zone budget to pay for things that others are already taking care of.
The only new elements in his proposal are the creation of a finance minister and a parliament for the euro zone.
But like all centralised institutions, these would tend to grow faster than lower-level national institutions.
Germany is a case in point, with the federal government taking over more responsibilities from the states over the course of decades.
This centralising phenomenon is so striking that German economics students are taught “Popitz’s law of the attraction of the central state”.
Macron’s proposals are like a Trojan horse, promising to stabilise monetary union but ultimately only delivering more centralisation.
According to this view, decisions are made in Brussels, not in national capitals.
But in the wake of the financial and refugee crises, there is rising popular opposition to European centralisation, with calls for national governments to reclaim control over their own affairs.
More centralisation would tend to increase popular disaffection and lead to a less-stable euro zone.