After a rocky 12 months menaced by populist parties, core Europe suddenly feels as if it is on the march again. The arrival of Emmanuel Macron in the Elysée Palace, Brexit, the growing transatlantic divide and Angela Merkel’s likely reelection as chancellor have all provided sudden impetus to fire up the Franco-German motor and bolster the EU — especially the eurozone.
The generally accepted thesis is that everything depends on Macron. The French president will need to overhaul France’s labor markets and improve its fiscal situation as a pre-condition for any Franco-German cooperation over eurozone reforms. But this is only half true. More important for the fate of the eurozone will be Merkel’s choice of coalition partner — and the party that assumes control of the finance ministry.
With no low-hanging fruit left to pick, the Macron-Merkel duo will be remembered for the compromises they manage or fail to make. And Paris and Berlin have less in common than they’d like you to think.
The relationship still isn’t quite natural, despite 50 years of close bilateral cooperation and the densest network of twinned towns. Instead, it carries the symptoms of a forced marriage. You never get used to the other’s idiosyncrasies.
The biggest trick will be agreeing on an upgrade to the eurozone’s architecture. The currency union needs to be strengthened without the Germans feeling they’re footing the bill or the French that they’ve agreed to wear a fiscal straitjacket.
In practice, only three reforms are really in play: first, the amount of fiscal space countries have to exploit before bumping into EU-wide fiscal ceilings; second, the completion of the eurozone’s banking union, especially in the area of a pan-European deposit insurance; and third, repurposing the eurozone’s bailout fund, the European Stability Mechanism, to give it a bigger mandate and potentially more powers.