Macron and Trump press Merkel to recycle the German trade surpluses

Joint Press conference by French and American presidents Emmanuel Macron and Donald Trump. The White House, Washington D.C., 25 April 2018. (Snapshot from a video, French Presidency Audiovisual Services). The two leaders have developed a rare personal relationship and made sure to show it, probably for the Germans to watch.

The divisive effect on Europe that Donald Trump’s trade war has generated, takes on new dimensions now. Only the European Sting highlighted this aspect, when the President of ‘America first’ fired the first shots, igniting the trade skirmishes. The differences, about how to respond to the US trade aggression, between the French President Emmanuel Macron and the German Chancellor Angela Merkel are getting out of control.

This European split threatens the West with an all out trade war over the Atlantic Ocean, if Macron has it its own way. France wants an all out confrontation with the US on trade, while Germany badly needs a moderate response, in order to avoid sure devastating consequences on her gigantic exports. One independent observer may see the whole thing as the strongest leverage France ever managed to acquire on Germany. This last country is so export dependent that the threat of a trade war may be the best ‘argument’, to convince Berlin to negotiate on other crucial issues too.

Macron’s vision

Presumably it’s about what Macron would like to change in the functioning of Eurozone, but Berlin obstinately blocks. The most important of the reforms Paris envisages, is a real economic administration in the euro area, with a real Minister of Finance endowed with a budget so important from a macroeconomic point of view, as to function like an income redistribution mechanism between the wealthy North and the poorer South. Just about what the national budgets do.

A test case for this Macron plan will take place in the coming months. It’s about the forgiveness of a large part of the Greek government debt, in order to make it viable. Germany has been, so far, stubbornly denying even the slightest trimming of the real value of the debt, even after it has become clear that the Greek taxpayers saved the German and the French mega banks back in 2010.

What about Greece?

On top of that, Paris and Berlin have had tens of billions of rainfall gains all along the three Greek bailout programs. The last of them expires on 20 August this year and Athens still waits for the Germans to honor their promise to cut down the debt, after the country becomes financially self sustainable, as is the case now.

To be reminded, back in the credit crisis of 2010, Greece was forced to accept to payoff her debts to the mega German and French banks at full nominal values of the initial loans. This was the first time in economic history when an insolvent country agrees to repay her debts at full face values, without the creditors taking any burden. In the last similar case, in the midst of the Latin American debt crisis of the 1980s, the American banks accepted to undertake a large part of the reshuffling cost of the debts, under the Brady Bonds scheme.

In the Greek case under the 2010 arrangement, the German and French banks unloaded their dab Greek debts in full nominal values to the willing European Central Bank and the central banks of Germany and France. Then, the Greek taxpayers were blackmailed into accepting to repay the central banks in full nominal values, under the threat of an ousting from the euro area. Thus the Eurozone financial system was saved and Greece was left to rot.

Coming from the cold

According to the terms of the July 2015 third and last bailout agreement, the lenders undertook the obligation to forgive a part of the Greek debt, if Greece produced important surpluses, as is the case now. Berlin, however, stubbornly denied honoring this commitment. On the contrary, France has been more or less fair to Greece all along the past seven years.

According to the initial arrangement, during the past seven years the central banks are being repaid by Greece in full nominal values of the maturing bonds, which were bought at a fraction of their face value. In this way the central banks are making some super windfall gains on the back of the Greek taxpayers. Again, Berlin insists in not returning those extra gains to Athens as it was agreed. On the contrary, France returns those funds almost regularly  to Athens. There are more problems though tormenting the euro area.

Italy puzzled

Italy, Spain, Portugal, plus some other smaller Eurozone member states and in many ways France too, are being punished by a super hard currency, the euro has turned out to be. All of them were accustomed to their own soft national moneys, which were recurrently devalued in order to support exports.

Italy is the main victim in this affair and its participation in the Eurozone has become a major internal political problem, haunting the country for years. In some ways, this is the reason the Italian parties cannot currently form a viable government after the elections of 4 March produced a hung legislative. In reality, the euro area of the 19 countries has become a catch 22 system, where the always growing huge German trade surpluses are the deficits of other member states. Macron says this arrangement cannot stand for much longer.

In short, the long term survival of the Eurozone as such, depends on the ability and the willingness of Germany to recycle within the euro area a good part of her gigantic foreign account gains, through investments and more consumption, something that the Germans still stubbornly deny. This said, the unity of the euro area is obviously in danger.

Germany must stop hoarding

So, Macron has taken it upon himself to undertake a major plan to restore the long term symmetry of euro area, between the affluent North and the poorer South. His main ideas are a Eurozone ministry of Finance and a minister of Finance, as mentioned above, plus a common system of bank deposits guarantee.

It turns out that Berlin considers all those ideas as an anathema, fearing that they may entail some extra costs for Germany if they are to be applied. Not a word though about how Germany has accumulated all that wealth. In view of that the European Sting reported on 23 April, “Last week it became clear that, both Macron’s key ideas about a stronger euro area union were politely but firmly rejected by Germany”.

Trump has helped

By the same token, this newspaper concluded in this same article , “For one thing, it became clear last week that the Germans place France definitely in the South, together with Greece, Italy, Spain and Portugal”. Along the same lines of thinking, Berlin reportedly denies now to do justice to Greece with her debts. Obviously, the Germans will go on protecting their short term ill perceived interests, for as long as this is politically possible. Understandably, the European Sting is not alone in grasping that.

In this respect, France, under Macron, supported by Trump in his efforts to ‘persuade’ Germany, has come to the same conclusion. Only a threat of a devastating for Germany trade war, may move the Germans in their collective thinking Christian Democrats, Social Democrats and the extreme right, xenophobic almost Nazi ‘Alternative für Deutschland’ alike. It may sound absurd that Macron and Trump are cooperating and both favoring an economic warfare over the Atlantic Ocean, but it may turn out to be the only way to move Germany.

Not to forget, the Americans equally suffer from gigantic trade imbalances with Germany. This reality aligns South Europe and France with the US against Germany.