In purely economic terms, and on the surface, the Euro crisis appears to be over. The recovery has gained in both strength and depth. Unemployment is now below its pre-crisis average. A number of former crisis-hit countries are staging an impressive recovery. Public debt ratios are coming down and the ECB is preparing to wind up its QE program by the end of the year. Nonetheless the recent meeting between Chancellor Merkel and President Macron in Meseberg, Brandenburg in the run-up to the forthcoming European Council meeting on 27-29 June can still rightly be seen as crucial. Economic misery continues, especially in Greece and Italy, but the deep wounds of the crisis have yet to heal in many countries. More fundamentally, the recovery hides the fact that major structural issues remain unresolved. The recent crisis of government formation in Italy illustrated this well, leading to a major spike in interest rates not only in the third-largest EMU-economy, with its low growth and debt ratio north of 130% of GDP, but also in other countries like Spain, with much lower debt and fast growth. The risk of contagion and of break-up has clearly not gone away. The recovery has merely papered over the cracks; but every recovery in history has given way to a downturn. The Euro Area, as currently institutionalised and with debt ratios still high, monetary policy highly expansionary, and political trust in short supply, cannot withstand a renewed downturn. [Read more…]
The Caribbean has been in the news lately for a succession of damaging hurricanes. Yesterday’s German elections seem almost certain to lead to a so-called Jamaica coalition between Mrs. Merkel’s conservatives (CDU/CSU), the liberal FDP and the Greens. (The party colours, black, yellow, green, are those of the island’s national flag). Is Europe in for stormy times? It certainly looks like it.
The debate on reforming the EU and especially the Euro Area is at a critical phase. There has been a flurry of proposals and reflection papers from the EU Commission and think-tanks. Jean-Claude Juncker’s recent State of the EU speech held out the prospect of a push towards deepening EMU. The new French President, Emmanuel Macron, has embarked on domestic reforms, part of the rationale of which is to open up space for Euro Area governance reforms. A speech on this issue is scheduled for this week. Everyone has been waiting for the German elections.
And now this. [Read more…]
On Sunday Emmanuel Macron embarks on a five-year term as President of the second largest EU country. An overwhelming two-thirds of those casting a valid ballot – and a sizeable 42% of all eligible voters – backed him. French people are weary of the political system, as manifested by the demise of the traditional centre-right and centre-left parties. While France faces several problems, its economic and social model is far from the basket case that it is often made out to be by those antithetic to a large public sector and who want more liberté and less égalité et fraternité.
Nonetheless, the fact is that without external support Macron and his La République en marche! Movement/party will fail. The reasons for this are not the superficial ones linked to the candidate himself. His youth and inexperience are not the issue. He may lack a party machine but he does not need a parliamentary majority for the party emerging from his movement. I would be surprised if he fails to put together a working-majority coalition between centrists and the right wing of the social democrats (PS) and the left wing of the conservatives. With the PS pulverised and the Republicans demoralised, I don’t anticipate any shortage of takers.
His problem – and it is very much Europe’s problem – is rather that his programme is very unlikely to work electorally under prevailing circumstances. Essentially, ‘Macronism’ consists of a two-handed, and supposedly joined-up, strategy. At home, ‘structural’ reforms to increase competitiveness and stimulate growth, along with moderate fiscal consolidation to reduce government debt levels. In Europe, far-reaching changes to economic governance in the direction of a step-change in political integration, driven by a new and equal partnership between that old two-cylinder motor: Germany and France. The alleged link is that the efforts to strengthen France domestically will force Germany to recognize it as an equal partner, while falling debt levels reduce the perceived risk to German policymakers of pooling sovereignty.
There are many reasons why this sensible-sounding approach is highly unlikely to work, unless external conditions change for the better. [Read more…]