Time for European Leadership with France and Germany at its Heart

By Updated at 2017-09-29 07:20:49 +0000

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German Chancellor Angela Merkel praised French President Emmanuel Macron’s ambitions for the European Union and said his ideas could be the foundation for “intense” Franco-German cooperation on the future of Europe.

Macron reiterated his view this week that a multi-speed Europe led by a core of 'avant-garde' countries could be the price worth paying for pushing the eurozone — and the European project more widely — forward in the aftermath of the Brexit vote.

"We should imagine a Europe of several formats — going further with those who want to advance, while not being held back by states which want to progress slower or not as far," Macron said.

Emmanuel Macron Sets Out Progressive Vision For EU

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"It appears that Macron would like a tighter, more centralized eurozone with France and Germany at its heart," Liam Carson of Capital Economics told DW. "However, he remained fairly vague on euro-zone specifics, probably because of the worse than expected outcome for [German Chancellor Angela] Merkel in the German election."

But Macron's words have fallen on some deaf ears in Central and Eastern Europe, a region struggling with political uncertainty and growing Euroskepticism, despite continued strong growth.

Of the nine new member states that joined the EU in 2004-2009, the Baltic countries, Slovakia, Slovenia, Cyprus and Malta have adopted the euro, while Poland, the Czech Republic, Hungary, Romania, Bulgaria and Croatia have not yet done so.

Critics argue that speeding up the process of monetary — as a precursor to fiscal — integration might fuel the overheating that was seen in Southern Europe after the 2007-8 financial crisis and subsequent recession.

But, "if the eurozone can generate growth throughout the 19 nations and not just the center, then any new institutions may prompt the non-euro members to want to join. If not, then the divisions would surely widen," Linda Yueh, a professor of Economics at London Business School, told Germany's public international broadcaster-DW.

'It's now or never'

Will Hutton, a British economist, told DW that while a two-speed Europe is a risk, "the time has come for this. Macron's plans are the biggest boost to Europe since the early 1990s, the era of Jacques Delors."

"Sure, Macron is using Merkel's weakness, but Europe is on the cusp of an economic run and while some eastern European economies might not be able to stand the pace, Europe can't go on at the speed of the slowest for much longer," Hutton said, adding that the UK might even be knocking back on the EU's door in the next five to ten years.

All non-euro EU member states except Denmark and the UK are already legally obligated to work toward adopting the euro, by satisfying various "convergence criteria," namely:

Inflation — Member states should have an average rate of inflation that doesn't exceed that of the three best-performing member states by over 1.5 percent for a period of one year before being assessed.

Government budgets — Member states' ratio of planned or actual government deficit to GDP should be no more than three percent. Their ratio of government debt to GDP should be no more than 60 percent.

Exchange Rates — Member states should have respected the normal fluctuation margins of the exchange rate mechanism (ERM) and should not have devalued their currency against any other member state's currency for at least the two years before being assessed.

Interest rates — Member states should have had an average interest rate over a period of one year before being assessed that does not exceed by more than two percentage points that of the three best-performing member states.

Central & Eastern Europe: weary and wary

"It seems unlikely that any of the major economies in Central and Eastern Europe will adopt the euro any time soon," Carson says.

"With respect to the criteria, as things stand, Poland, Romania and the Czech Republic all meet the debt, interest rate and inflation criteria for joining," although he added that there is a good chance that loose fiscal policy in Poland and Romania will cause budget deficits to widen beyond the 3 percent of GDP threshold by next year.

"Hungary’s deficit could also widen beyond 3 percent of GDP and with public debt still well above 60 percent of GDP, it also fails the debt criteria."

"More importantly, political appetite for joining the euro is generally waning. Accession to the eurozone in Poland and Hungary is unlikely to happen under the ruling PiS (Law and Justice) and Fidesz governments, which have both become increasingly hostile towards EU oversight of domestic policy," Carson says.

"Poland’s opposition is based on ideological grounds, but also public support is not sufficient. In the Czech Republic the main obstacle is public support.

Most of the parties would have been open to introducing the euro, but public opinion has prevented that so far.

In Hungary there is strong public support and a governmental decision ahead of the 2018 elections might be a popular step," Daniel Bartha, Executive Director of the Center for Euro-Atlantic Integration and Democracy (CEID) in Budapest, told DW.

Poland

"Brexit is not a risk for the EU … A bigger threat is if the EU starts to break apart into a multi-speed union, into blocs where some are stronger and can decide about others," President Andrzej Duda said this month. "The result could be a divided EU that's not politically or economically viable, which may break apart the bloc," he added.

The bedrock of common understanding that Merkel and ex-Polish PM Donald Tusk shared is now long gone. And ties between Warsaw and Paris have been strained since August after Macron's speech criticizing what he called Warsaw's attack on democracy and a French plan to tighten rules on EU posted workers, such as Polish truck drivers.

The Law and Justice (PiS) government has also taken aim at Germany, demanding war reparations, attacking plans to build a second Nord Stream gas pipeline to Russia that bypasses Poland and being highly critical of its western neighbor's policies towards refugees.

Nonetheless, Poland will start to debate whether to join the eurozone when the bloc becomes a stable and transparent entity, Konrad Szymanski, the Polish deputy foreign minister in charge of European affairs, has said.

About 80 percent of Polish international trade is accountable in euros, so entering the eurozone will significantly decrease currency risk and simplify transactions with foreign companies. Despite this, over two-thirds of Poles oppose joining the euro area.

Czech Republic

The Czech Prime Minister Bohuslav Sobotka wants his country to set a date for the adoption of the euro and has "the ambition to belong among the most advanced European countries.”

The Czech Republic has been cautious about joining the euro, on both the left and the right. No firm date has been set and in recent years governments have shied away from making predictions.

The country has a long reputation for running a credible monetary policy and traditionally has had interest rates below those in the eurozone.

"In the Czech Republic, Andrej Babis, who is the heavy favourite to become Prime Minister following next month’s elections, has continued to strongly reiterate that the Czech Republic shouldn’t adopt the currency," according to Carson.

Hungary

Hungarian economic policy cannot abandon its long-term intention of joining the eurozone, "but there is no rush," the economy minister, Mihaly Varga, said in June. Vargo said a currency system where monetary policy is unified but fiscal policy is not is also a viable route.

But a senior Hungarian politician said in early August that Hungary could only consider adopting the euro when its level of economic development is closer to that of the eurozone countries.

"That is, if there is genuine convergence," Andras Tallai, state secretary at the economy ministry, said.

"Otherwise, Hungary could be the loser of accession similar to some Mediterranean countries," he went on, adding that Hungary won't yet enter the Exchange Rate Mechanism (ERM) — a kind of ante-chamber for eurozone aspirants — but already meets all of the Maastricht criteria for adopting the euro, with the exception of the forint not being pegged to the euro.

Hungary has to enter to the ERM2 (the exchange rate mechanism) and meet the criteria for 2 years constantly. Hungary meets all other criteria:

inflation was 0.1 percent, the deficit 2.4 percent and interest rates are also around 1 percent, and although the debt level is beyond the 60 percent limit, as it is constantly reducing, Hungary also meet that criterion.

Romania

Former Romanian Prime Minister Sorin Grindeanu has said Romania will adopt the euro only after wages in the country come close to those in other EU member states.

Romania has second lowest minimum monthly wage out of 20 EU member states, of 1,450 lei ($341/321 euro), after Bulgaria, according to a study by KPMG.
A study conducted last November by the European Institute of Romania showed that the country could join the Eurozone 13 years from now - if it sustains the average growth rate of the last 15 years.

Currently, Romania is below 60 percent of the European Union average in terms of GDP per capita.
"The story is slightly different in Romania. The foreign minister, Teodor Melescanu, recently announced that Romania will adopt the euro.

However, he stated that this won’t happen until 2022. And given that previous plans to adopt the euro have been shelved, this date could easily be delayed. In short, Romania won't become a member of the euro-zone any time soon," Carson says.

Merkel holds the key

German Chancellor Angela Merkel also backed a plan for a European Monetary Fund (EMF) that would redistribute money within the bloc to where it was needed.

Macron believes that the monetary union suffers from too little centralization and needs its own budget, while Merkel views the bloc's problem as over-centralization and too little national responsibility.

Merkel has backed her Finance Minister Wolfgang Schäuble's proposal to turn the European Stability Mechanism, the eurozone's bailout fund, into the EMF, but she does not see the official possessing "expansive powers."

Merkel has said she wants a budget of "small contributions" rather than "hundreds of billions of euros."

France will implement these deep structural reforms on the proviso that Germany agrees to modest steps towards fiscal federalism in the eurozone. But many in Germany — and far beyond as well — appear skeptical about Macron's ability to achieve his domestic goals.

Still, observers say, Merkel will want to help Macron politically as it is in Germany's interests to see that he is not replaced at the next presidential election in France by Marine Le Pen of the National Front.

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