The Euro Zone Budget

BERLIN/BRUSSELS (Own report) - Financial experts are warning that, following the extensive breakdown of French initiatives for reforming the common currency area, a euro zone economic slump is possible. Over the past few days, Berlin has supported French President Emmanuel Macron's demands for introducing a euro zone budget - in form, but has eviscerated its contents. For example, the 19-euro zone countries will have a budget of €20 - 25 billion, at the most. This is compared to Macron's demand for a budget in the 3-digit billions, to offset the euro zone's crisis-induced imbalances. Efficient investment programs are hardly possible with a budget of €25 billion. This is all the more serious, with Germany, the economic draft horse of the euro zone, having just recorded a drop in its Gross Domestic Product (GDP). Because of additional serious risks - such as Brexit and the current trade wars - euro zone stagnation looms as a possibility. Observers are advising that, if necessary, the European Central Bank (ECB) should again be prepared to buy state bonds.

Macron's Setback

The euro zone budget is considered the primary objective pursued by French President Emmanuel Macron. Last week, following tedious negotiations, Germany and France reached an agreement and presented the project to the euro group on Monday. Alongside his proposal for a euro zone finance minister, in his hi-profile keynote address at the Sorbonne in September 2017, Macron also called for the establishment of a euro zone budget, to be able to offset the crisis-induced increase in centrifugal forces within the euro area by reducing socio-economic imbalances. Macron set the financial means to be contributed by the euro countries at several percent of their GDP, which would have amounted to several €100 billion. On the other hand, Berlin, from the very beginning, had been out to water down and obstruct this ambitious project. The current proposal is actually less comprehensive and restricts itself, as France's Minister of the Economy, Bruno Le Maire admits, to around 0.2 percent of the euro zone's GDP - €20 - 25 billion.[1] This comes very close to the concept of the German EU Budget Commissioner, Günther Oettinger, who, already at the end of 2017 - in reaction to Macron's ambitious initiative - had spoken of €20 billion, as the most that could be reserved for supplementary stabilization of the euro zone.

Unclear Financing

The details of this very vague deal that have now come to light, also confirm that Berlin has largely been able to prevail in the behind-the-scenes showdown. The information on the amount in the euro zone's budget is not really conclusive - financing is still unclear. In addition, the budget is supposed to be integrated into the overall EU budget. Therefore, the German-French compromise falls far below Macron's original expectations. The German side had found it important that the future euro zone budget be integrated into the EU's budget, to insure that it "concords with general EU policies and budgetary regulations," according to the justification given. Those regulations had been primarily formulated by Berlin in the wake of the euro crisis.[2] Another point of contention between Paris and Berlin is the digital tax, favored by Macron, which could be imposed on US internet companies. According to French plans, this could help finance the euro zone's budget. The German government is skeptical, because the German auto industry, which does a great deal of business in the United States, would be vulnerable to US retaliation. French automotive producers do less business with the United States, and therefore have little to fear from US punitive tariffs.

Divided by the Euro

Observers consider that the proposal for a euro zone budget - in its present form - does not merit the name.[3] It is little more than a "symbol" of both countries' ability to compromise. The German government has "plucked Macron's ideas to the bone." It is also unclear "whether Angela Merkel's successor" will even support the project. Most important is the fact that the opportunity to correct a fundamental "birth defect" of the euro zone has been squandered. In fact, with the elimination of currency exchange rates and because of the ECB's single currency policy, the economic disparities between the countries in the euro zone can only inadequately be addressed. This has led to the well-known imbalances in Germany's favor within the euro realm. A comprehensive euro zone budget would have been the "right way" to insure "that the living conditions within the currency union would not drift too far apart," explain critics. The current compromise proposal - primarily from Berlin's pen - does not fulfill this task and even makes a decisive fault line apparent, because it promotes "the division between euro zone and non-euro countries." The fact that the euro zone's budget is to be integrated into the overall EU budget - as has been imposed by Berlin - means that the EU, as a whole, must agree on it. What remains a total mystery is: Why should non-euro zone countries vote in favor of the budget? In fact, with this clause, Berlin has insured that Paris will also have to confront the non-euro zone EU countries to have its budget accepted.

"No Counter-Cyclical Function"

Financial experts expect that the wide-ranging defeat of the French reform proposals for a reinforcement of European integration, in reaction to the euro crisis and the rise of extreme rightwing parties, leave, for the time being, economic skid marks within the still precarious euro zone. In light of the looming economic slump, it will become even more "regrettable" that reform inside the single currency zone has been so "patchy."[4] The deal struck between President Emmanuel Macron and Chancellor Angela Merkel cannot fulfill the "ambitious counter-cyclical function," with which massive investment programs can help attenuate imbalances and reduce conjectural slumps. Instead, the EU commission is arguing with Rome over Italy's budget deficit, without any compromise in sight permitting the "financial elbow room needed for structural reforms."

"The Bundesbank is Wrong"

At the same time, Germany, the euro zone's economic draft horse, has just suffered an unexpected serious setback. The 0.2 percent slump in its GDP in the third-quarter of 2018 opens perspectives of a possible German stagnation - even without taking into consideration the special negative effects within the automobile industry.[5] Indicators for the euro zone's business climate point to a slowing down of the growth rate throughout the common currency zone. The euro realm, where Berlin persists in refusing noteworthy stimulus programs, looks more like an economy "struggling" to generate "a solid long-run growth rate," according to the British financial media.[6] The euro zone recovery, which, because of Berlin's austerity policy, had to overcome a particularly long recession, is "faltering." External risks are another factor. The consequences of the Brexit and the escalating trade wars are among the factors, to which export-dependent economies, such as the German, are particularly vulnerable. It is still unclear, whether the current "blip" of an economic slump will develop "into a true decline." The euro zone's monetary policy must be prepared, if necessary to react "rapidly and decisively," according to experts. In this context, they continue, it is decisive that the ECB maintain its option of buying state bonds and is ready to defend this policy, even against the criticism of German politicians and Bundesbank President Jens Weidmann. "In the last decade, the Bundesbank was wrong on this question, and it is still wrong."


[1] Deutschland und Frankreich einig bei Eurozonen-Budget. 16.11.2018.

[2] Eric Bonse: Eurobudget wird abmoderiert. 19.11.2018.

[3] Alexander Mühlauer: Das Euro-Zonen-Budget hat seinen Namen nicht verdient. 20.11.2018.

[4] Editorial Board: The eurozone recovery continues to falter. 21.11.2018.

[5] See also Paradebranche in Gefahr.

[6] Editorial Board: The eurozone recovery continues to falter. 21.11.2018.