At the weekend, French Presidential election frontrunner Emmanuel Macron told the BBC that EU leaders “have to face the situation, to listen to our people, and to listen to the fact that they are extremely angry today, impatient and the dysfunction of the EU is no more sustainable”. He then warned that if EU leaders do not correct this dysfunction, either France would exit the eurozone or the National Front would take over or both. I think what he says is true and let me explain why.
On Friday, I wrote why the Euro crisis will happen again in terms very similar to Marcron’s (the link is below):
Why the euro crisis will happen again and Italy will be involved https://t.co/xLFTG7eaJY
— Edward Harrison (@edwardnh)
While I focused on Italy because it is the weakest link in the eurozone right now, Macron is saying that France is also a weak link politically. And he points to EU dysfunction as to why. This is undoubtedly true.
First, let’s remember that Greece is not a special case. Yes, it ran up huge budget deficits in good times and bad. We’re talking 6.7% deficits in the best of times in 2007 before the financial crisis. That’s unsustainable in a currency union without monetary sovereignty. But the ‘punishment’ meted out for Greece — a Great Depression-like contraction in the size of the economy and rise in unemployment — is unconscionable. And this is exactly the outcome that was predicted —very precisely — by those who understood the dysfunction of the eurozone’s design – 15 and 20 years before Greece defaulted – (see Goodhart and Godley).
So, when Macron says “I do consider that my mandate, the day after, will be at the same time to reform in depth the European Union and our European project,” what he is saying is that he wants to fix these design flaws because his candidacy and win would be a mandate to do so. After all, he doesn’t even have an established party behind him. Why would tens of millions of French vote for a neophyte 39-year old to lead their country unless it showed exasperation with the status quo and desperation to avoid the Frexit that Marine Le Pen would represent?
And of course Macron is right when he says that Le Pen is waiting in the wings if he fails. Last week I said that Macron’s election would be a “recipe for a weak presidency and then the question has to be how the economy fares. If it doesn’t fare well, Marine Le Pen will be in a much stronger position in 2022.” The only way France and Europe avoids this fate is by acceding to Macron’s EU reforms.
What kinds of reforms are needed?
The dreaded debt mutualisation is the first order of business. It could be Eurobonds of European Safe Bonds as described last week in the FT. It doesn’t matter. What is clear is that the EU cannot rely on the quantitative easing for internal devaluation quid-pro-quo to prevent out-of-favour government bonds from cratering in value. That makes an unelected ECB dictator of terms and is politically radioactive – something that would lead to Le Pen or another nationalist elsewhere in the eurozone in the next downturn.
Second, the stability and growth pact needs to be reformed. It’s delusional to have people like Pierre Moscovici warning about the need for government spending cuts in France right before a pivotal election — if Brussels wants France to stay in the fold, that is. But that’s what happened this year. And if the next French president is forced by a weak economy into making cuts because tax receipts fall short, you can bet it won’t be a good thing for pro-EU sentiment.
Then, you need more political legitimacy in Brussels. Elections to the European Parliament come every five years. And MEPs have been directly elected since 1979. But no other EU institution is directly elected. Both the Council of Ministers and the European Council are only indirectly elected. The same goes for the European Commission. The Eurogroup has no role formally codified in EU law. When people denounce unelected bureaucrats in Brussels and point to Tusk, Juncker and Dijsselbloem, that’s what they’re talking about. They have no idea who these people are and why they have so much power. This has to change.
Finally, you need an overarching banking union. There is no reason to have Italian banks and the Italian government linked at the hip. This is where the next crisis could come, as Italian banks are very weak. After all, the reason Spain was forced into a bailout was its banking system. The reason the Irish government debt load is so high is that the ECB forced them to bail their banking system out. Having no credible overarching banking resolution mechanism puts contingent liabilities onto national governments already burdened by other factors.
But of course the Germans are against all of this. The EU and the eurozone are working really well for them. They have low unemployment, the lowest since reunification. They have decent GDP growth. They also have record current account and trade surpluses due to the formidable German export machine. And all of this has happened even as they still pay billions of dollars in solidarity taxes, 25 years later to bring Eastern Germany into the fold. Why would they want to change anything? Why would they have so much sympathy for nations trying to make adjustments that they would change the system?
The answer: if they don’t change the system, Europe will break apart — in a violent and chaotic way. This is Macron’s clear message. He is presenting himself as the establishment candidate who is innovative enough to change things from the inside — to make major reforms but keep the system intact. And he’s saying that If he can’t do it, the European Union will break apart. I think he’s right.