The enlightened hegemony of Angela Merkel
A new wind is blowing from the Rhine: a wind of pro-European rhetoric we have not been used to hearing from Germany. German public opinion is in the process of being prepared, with three heavyweights leading the charge: Chancellor Merkel, her finance minister Olaf Scholz and her foreign minister Heiko Maas. Such a mobilisation of the troops is necessary to free public opinion from the rhetoric of moral hazard and blame allocation that prevailed during the crisis and constrained the chancellor’s actions. Merkel had already understood that the defining issue of her final term would be a major European challenge. However, fearing a surge of eurosceptic forces in Parliament (and weakened by her controversial decision to welcome a million migrants), she prevaricated. But, fear being no defence against danger, those forces are now emerging more clearly all over Europe. So the time has now come to get a grip: a sense of responsibility, the courage to bring new ideas to the table and to reject the old orthodoxies, the ability to act, recognition of the benefits of the European Union (EU) and, above all, a willingness to tangibly set oneself apart from the false promises peddled by the populists.
Germany’s apparent transformation from a stance seen as hegemonic to an “enlightened” hegemony is based on an awareness that, in a post-Brexit Europe, Germany’s influential position makes it responsible for ensuring understanding and compromise between countries. A taboo would also be broken by openly affirming that “the most important national interest for Germany is Europe” and “stabilising the euro is its most fundamental interest”.
Major tectonic shifts, which have torn the old pillars of the post-war global order to pieces, are behind this sudden change: “America First”, Russian interference in the sovereign affairs of European states, Chinese expansion, and so on.
This enlightened hegemony on Germany’s part is needed to get the eurozone out of its predicament. Game theory can help us describe this predicament: driven only by their immediate national interests, countries find themselves in a state of non-cooperation that is disastrous for the group (the eurozone). This is known as a Nash equilibrium. Moving to another, more virtuous equilibrium – a Stackelberg equilibrium – requires a leader country that has the benefit of information asymmetry relative to other countries, notably with an intertemporal objective that allows it to see beyond the immediate reactions of the followers and extract itself from the deadlock. This is the vision that Germany, prompted by Emmanuel Macron, has finally embraced.
The Franco-German engine is trying to get Europe going again
While most observers had given up hope of further reform in European governance and thought Macron had, in the end, surrendered to what he called the “generation of sleepwalkers”, the last Franco-German summit saw both countries once again embrace a much more concrete and ambitious desire, particularly as regards economic and monetary union. The two countries agreed on a proposed eurozone budget to be operational from 2021, aimed at promoting competitiveness, convergence and macroeconomic stabilisation. This budget would finance investment in innovation and human capital. It would also support structural reform as recently proposed by the Commission. Lastly, macroeconomic stabilisation for countries hit by a shock could translate into either a temporary suspension of contributions to the eurozone budget or a European unemployment reinsurance fund. The budget would be funded via a financial transaction tax on the French model, taxation of the digital economy, and a portion of the take from the Common Consolidated Corporate Tax Base targeting major groups operating on a cross-border basis.
Everything has its cost!
As regards the European Stability Mechanism (ESM), France secured Germany’s agreement – albeit within a yet-to-be- determined time frame – for it to be enshrined into EU law, as well as for a common safety net for the Single Resolution Fund and a precautionary credit line to support stability, usable if there was a risk of liquidity default but without the need for a complete programme. Meanwhile, Germany secured agreement from France for the ESM to play an increased role in designing and monitoring programmes as part of a compromise with the European Commission, which has until now held the prerogative. It also secured stricter ex ante conditions for activating the precautionary credit line and the introduction of collective action clauses with single-limb aggregation, allowing debts resulting from different issues to be aggregated and thus making it easier to restructure all of a country’s public debt. This gives the ESM a new role of facilitating dialogue between its members and private investors, as is the IMF’s practice.
Not yet a done deal
While many details have been left for future decisions, notably in view of the December meeting of the European Council, the fact remains that, if the two countries manage to get the other Member States to accept their proposal, the foundations will have been laid, with the ESM’s new role and the introduction of a European budget, for a core institutional concept that could thenceforth be better financed and whose mandate could be further extended.
So there will be at least one clear proposal on the table at the end June European Council meeting concerning the economic dimension. This will have to be combined with the security policy and foreign policy dimensions, which will, more than ever, interfere with the game of alliances and concessions.
Paola Monperrus-Veroni, Group Economic Research