Franco-German plans for a transfer union?

On her inaugural visit to Paris, Chancellor Angela Merkel agreed with President Emmanuel Macron to draw up plans for reform of the European Union by mid-year. Whether these will point in the direction of a transfer union, as Macron hopes for, remains uncertain.

Different economic developments in the euro zone

The financial crisis has revealed it relentlessly: Contrary to expectations, the single currency did not lead to economic convergence in the euro countries. Unit labour costs in Greece rose by a whopping 23 percent between the introduction of the euro in 1999 and 2009, while they fell by 12 percent in Germany.

In the meantime, Southern European countries have made painful adjustments to wages and prices. The internal devaluation that has taken place so far is certainly not enough to restore lost competitiveness. The fact that southern Europe is currently growing again is mainly due to the expansive monetary policy of the European Central Bank.

For the countries of Northern Europe, however, money floods and low interest rates pose a threat: In the medium term, they will lead to overheating of the already strong economy and the formation of speculative bubbles.

Euro Finance Minister with his own budget

So what is to be done? In his speech at the Sorbonne last September, French President Emmanuel Macron presented a proposed solution. In addition to various ideas for the further integration of the EU, he recommended the creation of a Euro Finance Minister with his own budget. The money for this budget should come from CO2 taxes, a tax for Internet companies, Europe-wide harmonised corporate taxes and from the coffers of the member states. Macron wants to use it to help countries in crisis to grow more.

Commission President Jean-Claude Juncker recently outlined similar plans in his address on the state of the European Union. He did not demand a separate budget for the euro zone, but an increase in the EU budget and a separate budget line for the euro zone. In this way, the Union should stabilise euro states in crisis situations and promote structural adjustments. Juncker also called for the post of EU Economic Commissioner to be upgraded to a European Finance Minister. And the Commission President wants to develop the European Stability Mechanism (ESM) into a European Monetary Fund (EMF) modelled on the IMF.

Neither Juncker nor Macron came up with the subject of Euro bonds. Nevertheless, the two politicians' proposals are difficult to digest for Germany, as they mean nothing more than the introduction of new transfer payments from north to south.

Redistribution weakens reform zeal

Anglo-Saxon economists in particular welcome the joint budget. They believe that Europe has relied too much on monetary policy measures during the financial crisis and that the ESM is not effective enough. The United States and the United Kingdom, for example, which accepted considerable budget deficits and whose economy recovered more quickly than that of the euro zone, are taking this as an example.

According to a survey by the Federal Association of German Economists and Business Economists, only seven percent of economists in Germany can warm up to a common euro zone budget. The majority of German economists fear that the joint budget will lead to bad investments and prevent the South from carrying out painful structural reforms.

Federal Government supports European Monetary Fund

So far, this has also been the position of the Federal Government. Moreover, the government is open to the expansion of the ESM into a European Monetary Fund. However, it requires the EMF to be independent of the Commission and the EU Parliament. Only an independent monetary fund would have the necessary authority to implement reform goals in the crisis countries.

Even the idea of a European Finance Minister is not entirely rejected. However, the minds are divided on its tasks. Wolfgang Schäuble, for example, saw the European Finance Minister not as the master of his own budget, but as the controller who monitors compliance with the stability criteria.

In view of the diverging ideas, it is unclear what joint reform proposals by Germany and France could look like. It is also unclear what influence the SPD will have, which has clearly moved to the left with the new edition of the grand coalition. However, it is not to be expected that the Chancellor will turn to Macron's plans to create a Euro Finance Minister with her own budget. Rather, it will pursue its policy of small steps and only accept proposals whose transfer effect is not immediately apparent.