Germany resists Macron’s plan for closer and more cohesive Eurozone; Paris and Berlin at odds

Last Thursday, the French President Emmanuel Macron went to Berlin to meet the German Chancellor Angela Merkel. The focus of the meeting was on key aspects of Economic and Monetary Union, the European asylum system and the common foreign policy. Berlin, 19.04.2018 Foto: Bundesregierung/Bergmann.

Last week, surprising everybody, Francois Villeroy de Galhau, Governor of the Bank of France and member of European Central Bank’s Governing Council said that the decision to stop ECB’s extraordinarily accommodating monetary measures this year, is premature. So, according to him, the central bank must continue applying its extra relaxed measures well beyond this year.

In detail, and according to Reuters, de Galhau stated last Wednesday: “The European Central Bank would have to alter its march toward a more normal policy stance, if growing risks from protectionism, exchange rates or market swings end up depressing inflation”. Seemingly, the timely announcement of EU’s statistical service, the Eurostat about the March inflation rate justified him. Let’s take one thing at a time.

Faulting itself, Eurostat announced last week that the euro area annual inflation rate in March 2018 was 1.3% and not 1.4%, as it had estimated it to be on 4 April, at its traditional early flash reckoning of the previous month headline inflation. This is down from 1.5% a year earlier and up from 1.1% in February 2018. In any case, this is far below the target of 2% the European Central Bank considers as appropriate for Eurozone, the European area of 19 countries using the euro as their single and common currency.

Inflation still fades

For more than three years now the ECB follows an extra accommodative monetary policy, having printed and circulated at least €2.5 trillion and keeping its main interest rate flat zero. The objectives of this major operation are to revive the fading inflation and support the euro area economy grow. Three years is a long a long time though for such an extraordinarily strong monetary stimulus, while during the same period and partly thanks to ECB’s measures, the Eurozone economy has achieved a strong growth path.

In view of that Mario Draghi, the President of ECB and architect of the monetary easing, has conceded that the printing and injecting of €30bn a month into the Eurozone economy will end next September or the latest in December. Germany has been relentlessly pressing Draghi towards this direction.

All along the quantitative easing operation, Germany and some other euro area member states under Germanic influence have been pressing hard, sometimes under the table, for a stricter monetary policy and higher interest rates to serve their interests. Nevertheless, more Eurozone member states needed the extra accommodative measures in order to refinance their debts at lower interest rates and thus be able to also support growth. In any case, during the past few months, and precisely after December 2017 a consensus has being achieved between the two sides, and ECB’s Governing Council decided that the extraordinary monetary easing will end this year.

More easing needed

Yet, the announcement of Eurostat that the March inflation rate is below its flash estimate of the beginning of this month, sets a new wider environment. It becomes clear then the ECB has not yet managed to fulfill its mandate to bring inflation close to 2% or slightly below it. Evidently, 1.3% is not slightly but far below the target. This reality seems to contradict the consensus to bring to an end the extraordinary monetary policy. Apparently then, and according to its statues as provided by the EU Treaty, the ECB is obliged to continue its monetary easing measures, in order to bring inflation close to target and thus fulfill the fundamental postulate of its mandate.

This objective reality, offered an opportunity to the French central banker, with the impressive name of Francois Villeroy de Galhau, to try overturn the inspired by Germany ECB’s Governing Council decision, about ending  the extraordinarily generous monetary policy in some months. Reportedly though, the Germans still think it’s about time the ECB stopped helping the South refinance its debts at low interest rates. There is more to it.

A Franco-German conflict

The long and laborious Franco-German meeting between Emmanuel Macron and Angela Merkel last week proved there can’t easily be a common effort between them, to revitalize Eurozone the way the French President has outlined and the Chancellor only cautiously has discussed so far. Last week it became clear that, both Macron’s key ideas about a stronger euro area union were politely but firmly rejected by Germany. It’s about Macron’s true ‘banking union’ with a common bank deposits guarantee and a ‘fiscal union’ with a European Financial Minister with enough money, to finance a real economic convergence between the North and the South.

For one thing, it became clear last week that the Germans place France definitely in the South, together with Greece, Italy, Spain and Portugal. As for the two ‘Macron ideas’ about a stronger Eurozone union, it’s very characteristic what the prestigious business news group Handelsbaltt wrote: “Mr. Macron, like his counterparts in the southern euro zone, would like two things: The first is the completion of a euro-area ‘banking union’, meaning common deposit insurance for the whole currency area, as the US has it….Mr. Macron’s second wish is ‘fiscal union’. By that he means the appointment of a finance minister for the whole euro area, who would oversee a budget — akin to national budgets — funded by the member states”.

No solidarity

This means at least there is consensus between the North and the South about what is at stake in achieving a ‘stronger Eurozone union’. Next comes what the Germans think about it, always from the good newspaper: “She (Angela Merkel) would be open to common deposit insurance ‘not in the immediate, but more distant future,’ she said. Coming from her that probably means never. And fiscal union is a non-starter, because to Germans it would mean a ‘transfer union’. Her own party, the Christian Democratic Union, would never countenance it”.

For her sister party, the super conservative Christian Social Union (CSU) of the wealthy Bavaria, things are more clear cut. Already, the affluent Bavarians feel as being ‘robbed’ by the poorer Berliners, because the latter are supported with Bavarian taxes. What if the Bavarians and the other wealthy Germans are asked to support the Greeks, Italians, Spaniards, Portuguese and finally even the French? No way!

Keeping their gains

In short, there goes the big French idea for a stronger and closer Eurozone…financed with German money. Then, very probably, that’s why de Galhau now tries to keep at least the ECB door open, for this indirect monetary support for the South. As for the German plain ‘nein’ for the banking and fiscal unions, the truth is that it will be like that, unless Paris manages to politically or probably otherwise force Berlin to concede.

It seems the Germans don’t understand any other language than force. The idea of recycling through investments and consumption expenditure the trade gains they have had from the South, doesn’t mean anything to Teutons. The Americans had the foresight to do that with Europe after WWII, but the Germans have forgotten it. They prefer to keep the gains they have hoarded from free trade with the South, no matter what.