Franco-German ‘agreement’ is another European dead-end

The latest ‘reform’ proposals from Europe might be taken as a sick joke if the players were not serious. On Sunday, November 18, 2018, the French President gave a speech at the traditional commemorative ceremony in the German Bundestag to mark the Volkstrauertag (National Day of Mourning), which has been part of German life since 1922 (originally to mark those who died during World War 1). His speech (Jacques Chirac was the last French president to address the Bundestag on June 27, 2000). His speech was two days after the respective finance ministers signed an ‘agreement’ to establish a “Eurozone budget”, which the French finance minister hailed as being a “major political breakthrough”. While that summation is questionable, it certainly is not a major economic breakthrough. It is a dud. As dud as all the reform proposals that have come before it. Just like the fake window dressing in Eniskillen in preparation for the G8 Summit in June 2013. Macron might have felt he was a big player on the world stage but the Germans have his measure as they have had of all French Presidents over the last several decades. The French really were the drivers of the Eurozone and they thought they were destined to restore their prominence in Europe. The Germans knew otherwise. And so it goes with the latest ‘agreement’. There is nothing in it that will save the Eurozone from crisis or restore sustained prosperity. Another European dead end.

Just for history, here is a picture of the fake shop fronts and businesses in Eniskillen which were created by using “large wraparound stickers placed on the windows” of abandoned shops etc “to give the impression from a distance of an occupied business” and to make it look like the town was prosperous (Source).

Hilarious.

I hate the use of the word reform in the context of the Eurozone. Reform means to “make changes in (something, especially an institution or practice) in order to improve it.” It doesn’t mean continue to do the same thing under some different guise. None of the changes that have been made to the Eurozone have been what a reasonable person would construe as being of a reform nature.

So the Europhile Left, which on a daily basis looks out its window and plans new ways to salvage the ship wreck, should abandon their dreams and instead become active at the nation-state level to ensure Member States can exit with relative impunity.

The Eurozone boat was assessed to be rotten to the core long ago. It is beyond help!

French Presidents do not often address the Bundestag.

When Jacques Chirac addressed the Bundestag in Berlin on June 27, 2000, he told the gathering that General de Gaulle’s “ambition … [that] … the whole of Europe will be able to secure its equilibrium, its peace and its development” has been (Source):

… to a large degree realised …

We took a historic step forward with the adoption of the euro … With the euro, we have consolidated the unification of the single European market and equipped ourselves with a powerful instrument for boosting trade. We have anchored in the minds of our fellow citizens a sense of belonging to a single economic entity and, beyond that, a political and human entity. The people of Europe now have their own currency.

He ended the comedy routine with an appeal to:

1. “making the European Union more democratic” because “European integration has been far too much a matter solely for our country’s leaders and elites.”

2. “We must also make sure that in an enlarged Europe the capacity for forward impetus survives”.

3. “Europe playing a major role on the international stage, must have strong institutions and an effective, legitimate decision-making mechanism”.

If you are familiar with the history of ‘integration’ in Europe, which I prefer to think of as ‘disintegration’, especially if you consider the divergence of living standards across the geographic space and the dominance of technocrats over citizens preferences (think Greece 2015, think Italy 2018, as just two examples that pop up), then this sort of rhetoric was always offered by these statesmen types (mostly male in the earlier days).

Chirac actually considered that they were creating “equilibrium” except what has emerged is a system that is, on a daily basis, teetering on the edge of collapse and relies on the ECB breaking the laws defined in the Treaty to stop Member States becoming insolvent.

The union is still in chaos after the GFC and the next crisis will push it further into oblivion.

Hardly what I would judge to be “a large degree realised”.

Anyway, that was in 2000.

François Hollande also addressed the German Bundestag on January 22, 2013 and he claimed that “we are already out of the Euro Area crisis” and we have “created a growth compact” (Source).

He made all sorts of claims that Europe would need a ‘federal’ fiscal capacity and that it would have to:

… control spending – as everywhere, and we’re certainly doing it – but also to free up resources to prepare the future.

Hollande left Berlin with no uncertainty about what the Germans would tolerate as masters of the union.

It was clear that Germany will never tolerate the creation of anything like a functioning federal fiscal capacity.

I wrote about that in this blog post – France has received its orders from the masters (June 27, 2017).

On November 16, 2018, a few days before Emmanuel Macron was in front of the Bundestag, the French and German agreed to support the creation of a “euro zone budget focused on financing investment and reforms that help euro zone economies converge”.

The Reuters article (November 19, 2018) – EU welcomes Franco-German budget idea, more work needed – also claimed that:

A Franco-German proposal for a euro zone budget could be a “breakthrough” for a euro zone reform package next month, but more work on it is needed …

Here is the 2-page document – Proposal on the architecture of a Eurozone Budget within the framework of the European Union (agreed on November 16, 2018) – and you can see for yourself what it says.

It is an iteration of the Meseberg Declaration (signed on June 19, 2018), which I considered in detail in this blog post – The Meseberg Declaration – don’t hold your breath waiting (June 26, 2018).

It says that:

1. “The Eurozone budget would foster convergence and incentivize reform implementation in particular by co-financing growth-enhancing public expenditures such as investments, research and development, innovation and human capital.”

So it is not a “stabilisation tool”, which after all is a key function of fiscal policy – to offset fluctuations in non-government spending in order to avoid recession or economic downturns and/or overheating and inflation.

2. “the Eurozone Budget would be principally subject to the general EU budget rules and the framework of its basic act. At the same time, it would operate with the strategic guidance of the Euro summit, which would be operationalized by the Eurogroup on a yearly basis.”

In other words, as noted in (1), it would not be seen as a short-term spending capacity to offset fluctuations in non-government spending (either up or down). It would be locked into the seven-year fiscal period and would only be available for longer term things such as “research and development, innovation and human capital”.

Don’t get me wrong. These are important responsibilities for governments but they are in addition to the counter-stabilisation function of fiscal policy.

Without that an economy can be doing all the right things with respect to R&D, industry funding, education and training and still endure a massive recession if non-government spending falls sharply, which is wont to do so from time to time.

And fiscal policy should not be restricted to providing a spending buffer when non-government spending is weak. It also has to work against the cycle when non-government spending is becoming excessive and pushing nominal spending growth ahead of the capacity of the supply-side (productive sector) to respond by producing real goods and services.

Clearly, the French and the Germans who are parties to this agreement have never really considered that possibility. There is nothing in their “Eurozone budget” proposal that provides for this European-level capacity.

And by placing it within the overall EU Budget process, the Germans won out – ensuring rigid discipline is maintained.

3. “The Eurozone budget would primarily be financed by external assigned revenues … The assigned revenues would consist of regular contributions by Eurozone Member States, collected and transferred to the EU budget on the basis of an intergovernmental agreement (IGA).”

So the Member States have to find funds to contribute to the Eurozone fiscal capacity. That means there would be no independent capacity to create net financial assets at the European level.

It is just a temporary redistribution mechanism.

4. “Member States and programmes could only receive support by the Eurozone budget if they pursue policies that are in accordance with their obligations under the European economic policy coordination framework, including fiscal rules.”

Conditionality. So, in the current context, Italy would be forced to contribute to the fund but would not be able to draw on it because it is deemed to be in conflict with the Stability and Growth Pact and the Fiscal Compact.

Thus it contains the usual bully clauses.

If you are interested here is the joint press conference with the respective Finance Ministers Bruno Le Maire and Olaf Scholz on November 19, 2018.

The French minister Bruno Le Maire must have been rolling flora in paper when he described the ‘agreement’ as:

… a major political breakthrough.

He was also candid (perhaps the flora was wearing off!) when he said:

The eurozone as it stands is not able to face all economic crises … the Eurozone budget would allow us to face all situations …

And, the ‘agreement’ provides no effective buffer to prevent that crisis when it comes along.

It would not allow Member States to cope with a major downturn in non-government spending.

For a start it would set as an intergovernmental agreement, which as history tells us, take forever to achieve. Crises come and go while the 28 (soon to be 27) Member States fight among themselves about where to put commas and full-stops in Communiqués.

The latest iteration sets as 2021 (3 years hence) the date for the inception of the plan – so nothing urgent, as usual.

You will note that there is no mention in the ‘agreement’ about the size of the fiscal fund that they envisage.

Le Maire said that he would hope the fund would be of the order of €20-25 billion, which if you do the arithmetic would be no more than 0.2 per cent of the Eurozone GDP – that is, miniscule and functionally useless in a time of crisis.

But we know from previous statements by German Finance Minister Olaf Scholz that it will be small.

In his first fiscal statement to the Bundestag as Finance Minister on May 15, 2018 he said:

I have the impression that we can also make a difference with 1 percent of the economic output of the world’s largest trading bloc.

I considered that in detail in this blog post – Die schwarze Null continues to haunt Europe (May 21, 2018).

Sholz’s commitment to this ‘agreement’ is a smokescreen.

As I showed in the blog post cited above, the 2017 EU Budget allocated €157.86 billion. Scholz’s 1 per cent rule would in 2017 terms amount to €153,264.68 million.

That is, Germany is proposing a smaller EU ‘budget’ going forward, which maell his concilitory statements about Emmanuel Macron look pretty false, given the latter clearly wanted to expand the EU allocation.

And, of course, the capacity of both Germany and France to deliver on anything much at present is questionable given the declining popularity of the governments in both countries.

I cannot see the likes of Friedrich Merz or Jens Spahn going along with this agreement. And in France, Macron is on the way out such has been his failure as a politician.

Journalist Andreas Kluth’s article in the Handelsblaat (November 22, 2018) – The euro must be fixed or dropped – depicted the ‘agreement’ as being “risible”:

They are too timid to integrate the euro zone economically. Simultaneously, they are large enough to embolden Eurosceptics and populists.

Win, win, not!

He provides us with an insight into the way the Germans are ‘playing’ the French.

It is a game of welcoming Mr President to the Bundestag to give him a face saving public presence and then put the foot down behind doors:

… the Germans, aware that they must help Emmanuel Macron avoid humiliation in France, acceded only nominally to using the word “budget.” In reality, fearing a “transfer union” in which northern Europeans would chronically pay and southern Europeans receive, they are hobbling the new fiscal tool. First, the budget will be tiny. Second, it will squirm in a straitjacket of rules that prevent truly discretionary spending to manage aggregate demand. This makes the reform pointless.

And so it goes.

More window dressing.

And guess what?

A few days after the agreement came to light, the Euro area finance ministers, particularly the Northern Member States were not at all enamoured.

The EUObserver article (November 20, 2018) – Cold shoulder for Franco-German euro budget plan – is self-explanatory.

The day after this article, the EUObserver published a follow-up (November 21, 2018) – Challenges for new Franco-German eurozone plan – which reflected the dust settling somewhat.

They highlight that the ‘agreement’:

… characterises the EU’s overall “too little too late” approach it followed throughout the eurozone crisis.

And it faces a major “obstacle” in the from of the “Netherlands led so-called Hanseatic League 2.0, composed of ten eurozone and non-eurozone members.”

In this blog post – Europhile reform dreamers wake up – there will be no ‘far-reaching’ reforms (March 12, 2018) – I discussed the – Joint Statement – released by 8 Finance Ministers from the smaller Northern EU Member States on March 6, 2018.

This is the group that is, in the words of the EUObserver, pushing:

… for a stricter and revamped European Stability Mechanism (ESM) with more tools and powers to scrutinise and monitor member states’ finances, and bailouts with more conditions and strings attached, while it opposes more risk mutualisation of risks.

In short: less solidarity.

Less solidarity! say that out aloud.

Not convergence. Less solidarity!

Conclusion

More of the same from Europe really.

This is a rolling-type circus.

The acts currently playing out are Italy; Franco-German grandstanding; Hanseatic League 2.0; right-wing popularism; the social democratic demise; ‘the Macron-Merkel on the way out show’; and more.

Meanwhile millions remain unemployed and poverty rates are rising.

And the British Treasury is doing all it can to keep Britain in this monstrosity.

Their latest salvo – EU Exit: Long-term economic analysis, November 2018 – which the press is uncritically sensationalising, is one of the most dishonest and embarassing pieces of analysis that you will ever read.

Amazing that HM Treasury would stoop to this level of misinformation. I think HM should tell HM “to put a sock in it”.

I will consider that Report next week.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.