Europe: On Eurozone Reform, France's Northern Allies Remain Unconvinced

3 MINS READOct 11, 2017 | 15:03 GMT
Forecast Update

In Stratfor's Fourth-Quarter Forecast, we wrote that intense discussion about the future of the European Union would dominate the last quarter of the year in Europe. We noted that debates would once again reveal the frictions between Southern and Northern Europe, as the former demands more public spending and the latter demands more control of their fiscal policies. The indications that Northern European powers are skeptical of France's eurozone reform goals align with our forecast.

France remains insistent on its grand designs for eurozone reform, but its partners in Northern Europe are less than impressed by the country's ideas. In late September, French President Emmanuel Macron presented a series of proposals for EU reform, including greater public spending at the continental level, a separate budget for the eurozone and the creation of a finance minister for the currency area. And in a speech in Frankfurt on Oct. 10, Macron expressed concern about the European Union's inability to approve economic measures when it has successfully increased cooperation on issues such as security, energy and migration. According to Macron, leaders ought to be finished debating the future of the bloc before the next elections for the EU Parliament, which are scheduled for mid-2019.

Some of Macron's allies, meanwhile, have expressed alternative interests, as well as a general unwillingness to share financial risk with Southern Europe. After the German election produced a fragmented Bundestag, German Chancellor Angela Merkel's conservatives began focusing on negotiations to form a coalition government. German officials are now too preoccupied to embrace Macron's proposals. In an interview published Oct. 11, Merkel even said Berlin needs more time to study Macron's proposals in detail. She also said Germany is against the pooling of national debt, a policy that Macron mentioned during the French presidential campaign.

Outgoing German Finance Minister Wolfgang Schaeuble further communicated German resistance in a policy paper that he presented to his eurozone peers on Oct. 9. The paper insisted that eurozone countries must be more fiscally responsible and that public spending cannot be a substitute for structural reforms. It also suggested turning the eurozone's permanent bailout fund into a European Monetary Fund (EMF). The EMF would replace the EU Commission as a means of monitoring economies in the eurozone, and would also detect early problems and suggest policy. Schaeuble has previously expressed concerns over the EU Commission's leniency with Southern European countries. While Schaeuble will not be the next German government's finance minister, if the pro-business and somewhat Euroskeptic Free Democratic Party takes over the Finance Ministry, it could support his views.

And Germany is not the only Northern European country reluctant to follow Macron's lead on increasing economic integration in the eurozone. Seven months after the Dutch election, four of the Netherlands' political parties reached an agreement on Oct. 9 to form a government. The coalition agreement includes provisions to resist any plans to turn the eurozone into a "transfer union," where funds are transferred from countries in Europe's wealthier north to nations in the relatively poorer south. The parties also support Germany's interest in focusing on structural reforms rather than public spending in times of crisis.

The statements made by Germany and the views expressed by the new Dutch government confirm that countries in Northern Europe are still reluctant to increase financial risk sharing with Southern Europe. Moreover, they show that the Continent's North-South divisions are still alive and well. So despite France's enthusiasm for economic reform, it seems that the road to real results will be long and winding.

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