French President Emmanuel Macron has dropped his bulldozer approach to European politics. It seems to be working.
France has a difficult relationship with capitalism. 69 percent of the French think markets do more harm than good (55 percent in Germany), according to polls. Believing in laissez-faire is considered naive, whether it’s about the economy or raising your kids.
But this does not preclude the country from having an affinity for finance. If you want to talk to a quantitative analyst in New York who creates esoteric financial products, you’ll likely be able to do so in French. And the French have a pragmatic relationship to debt. The average household holds debt worth 121 percent of net disposable income. Before having kids, couples typically get a flat and a 25-year mortgage—a knot much harder to untie than marriage!
So when President Emmanuel Macron proposes issuing European bonds to shoulder the cost of the COVID-19 crisis together, the French don’t worry much. Debt is part of life and contracting it together part of being a community. “Solidarity means common financial means,” French finance minister Bruno Le Maire said outright when detailing his proposal.
Siamo Tutti Italiani
Macron’s insistence on a European debt-instrument is primarily about Italy. Paris is seriously concerned about the economic and political dynamics across the Alps.
Lega’s Matteo Salvini and especially Giorgia Meloni from the post-fascist Brothers of Italy are not so different from Marine Le Pen. Salvini’s and Meloni’s parties together are polling above 40 percent, high enough to give them a parliamentary majority. With the Five Star Movement potentially splitting over whether to use the European Stability Mechanism (ESM), snap elections are not out of the question.
Beyond the short-term, Paris believes the EU’s fate will be decided in Rome, too. Italy, like the rest of Europe, will need to mobilize enormous funds to weather the crisis. But Italy’s debt stands at 135 percent of GDP. So far, the Italian government has only dared to disburse direct fiscal measures worth 1.5 percent of GDP to keep its business and citizens afloat. By comparison, Berlin’s measures amount to more than 4.5 percent of GDP, as research by the Jacques Delors Center shows.
No wonder Milan bankers worry about a wave of insolvencies crashing through the country’s economy. And how could the populists be kept at bay in such a scenario? For Europeans the motto is really “siamo tutti italiani” (“We are all Italians.”), as Le Maire declared. And for Paris in particular. French banks are by far Europe’s largest holders of Italian Treasuries.
Rendezvous with Reality
Even before the current crisis, it was clear to Paris that Europe had to become more of a transfer union—by borrowing together and increasing EU spending. There is simply no way around it in a currency union. That’s why most German economists initially opposed the euro, arguing in a famous 1992 manifesto that it would inevitably necessitate “high transfer payments as part of a fiscal equalization.”
Macron sees no value in moral hazard arguments. Rome has run a primary budget surplus since 2011. Once in the debt trap, no austerity diet can get you out of it. But demanding repentance without the promise of deliverance cannot work in the long-run. France’s moral hazard policy of drowning Germany in debt after World War I backfired. That’s why the allies cancelled Germany’s debt after World War II, Macron recently lectured the Financial Times.
For Paris the feeling is thus that the day where German politics finally has to bend to economic reality has come. In fact, in Macron’s eyes the negotiations are less about whether there will be some form of debt mutualization, but how it is done. Either one holds on to today’s method of the European Central Bank buying Italian Treasuries, or Europeans go for the “clean” and honest alternative: common debt.
Macron, of course, prefers the second option. There are four reasons why.
First, the current solution undermines the ECB’s monetary independence and comes with legal risks. The ECB’s decision to lift the limit on how many bonds from a eurozone member it can buy will almost certainly be challenged in German courts.
Second, if the ECB does the heavy-lifting, the EU does not get to claim credit for helping Rome. Macron understands that this crisis is also a battle of narratives. That’s why he gives interviews in the Italian press defending the EU.
Third, European bonds are another facet of Macron’s “sovereign Europe” idea. Having a large euro-denominated sovereign debt market with an abundance of safe assets is a precondition for overcoming Europe’s dollar dependence. European bonds would be a first step toward countering Washington’s habit of weaponizing the dollar to override EU policy, for example on Iran.
And most importantly, only if the money is raised through a European bond can it be given to the worst-hit EU members via grants. Sure, European loans would yield some interest savings for Rome and Madrid. But that won’t be enough. As Macron said after the EU’s leaders videoconference on April 23, whether the EU or the ECB acts as creditor, the loans still end up worsening Italy’s debt-to-GDP ratio. Paris wants outright transfers, may be also for itself. The lockdowns are particularly costly for service-oriented economies such as France.
In order to get what he wants, Macron is dropping the bulldozer approach to EU politics that hasn’t served him well so far. When he came to office, Macron did not lose time to demanded a sizeable budget for the eurozone. He hardly took into account other countries sensibilities in his campaign and ended up with next to nothing: a budget without money.
For once, Macron is not moving alone; he has managed to build an alliance around his cause. It even includes low-debt countries like Luxembourg. This is no longer just a North-South debate.
For once, Macron is framing the problem rather than dictating what he thinks is the best solution, giving Paris more negotiation space. It doesn’t matter whether it is a separate vehicle or the European Commission that issues bonds and hands out grants, as long as it is done, Macron said after the inconclusive EU summit.
And for once, Macron isn’t asking for the impossible. He doesn’t campaign for a move to fiscal union all at once. Instead, he reassures Berlin that the debt-issuance and spending measures should be time-limited.
It appears to be working. Angela Merkel, for the first time, stated she can imagine the European Commission issuing more bonds to finance the recovery. And Merkel told the Bundestag she wants to massively increase the country’s contribution to the EU budget, which serves as the main tool of fiscal transfers within the union. Both would cross traditional German red lines. It is still early days, but Paris is more hopeful than it has been for a while.