FRANKFURT – When Emmanuel Macron won the French presidential election, many Germans breathed a loud sigh of relief. A pro-European centrist had soundly defeated a far-right populist, the National Front’s Marine Le Pen. But if the nationalist threat to Europe is truly to be contained, Germany will have to work with Macron to address the economic challenges that have driven so many voters to reject the European Union.
This will not be easy. In fact, within a couple of days of the election, core planks of Macron’s economic platform were already under attack in Germany. For starters, his proposed reforms of eurozone governance have been met with substantial criticism.
Macron’s campaign manifesto embraced the idea of more eurozone federalism, characterized by a shared budget for eurozone public goods, administered by a eurozone economics and finance minister and accountable to a eurozone parliament. It also called for greater coordination of tax regimes and border controls, stronger protection of the integrity of the internal market, and, in view of the rising threat of protectionism in the United States, a “made in Europe” procurement policy.
An attempt at re-opening the debate about Eurobonds, or the partial mutualization of eurozone public-sector liabilities, was viewed as a pie-in-the-sky suggestion, mostly just a distraction. And, incidentally, it appears nowhere in Macron’s platform. Far more disturbing to German pundits and policymakers is Macron’s desire for Germany to make use of its fiscal capacity to boost domestic demand, thereby reducing its massive current-account surplus.
These are not new ideas: the European Commission, the International Monetary Fund, Macron’s predecessors, and economists throughout Europe have advanced them often. And, just as predictably, Germany’s government has roundly rejected them, relying on reasoning that, like its counter-arguments, is well rehearsed.
For the most part, German economists and officials believe that economic policy should focus almost exclusively on the supply side, diagnosing and addressing structural problems. And German officials also regularly suggest that their economy is already performing at close to its supply-determined limits.
In fact, far from viewing the current-account surplus as a policy problem, the German government sees it as a reflection of the underlying competitiveness of German firms. It is the benign upshot of responsible labor unions, which allow for appropriate firm-level wage flexibility.
The accumulation of foreign assets is a logical corollary of these surpluses, not to mention an imperative for an aging society. Indeed, German policymakers view as essential a reduction of Germany’s debt-to-GDP ratio toward the 60% ceiling set by European rules. When, if not in good times, does one have the chance to save?
This stance does not align particularly smoothly with Macron’s economic program. While Macron’s program includes significant proposals for addressing supply-side issues with the French economy, it also favors output stabilization and, more important, increased spending in areas like public infrastructure, digitization, and clean energy to boost potential growth.
Despite Macron’s decisive victory, he faces an uphill battle implementing his economic agenda. Even if the National Assembly, to be elected in June, endorses his reform program, street-level resistance will be no less fierce than it has been over the last few years.
Germany, however, has good reason to support Macron’s supply- and demand-side reforms. After all, France and Germany are deeply interdependent, meaning that Germany has a stake in Macron’s fate.
While it is true that the German government cannot (fortunately) fine-tune wages, it could, out of sheer self-interest, provide for its future by investing more in its human and social capital – including schools, from kindergartens to universities, and infrastructure like roads, bridges, and bandwidth. This approach would reduce the private user cost of capital, thereby making private investment more attractive. It would also create domestic real assets, reducing Germany’s exposure to foreign credit risk. A lower current-account surplus implies a more sustainable net-financial-liability position for Germany’s partners.
If Germany and Macron don’t find common ground, the costs to both will be massive. No malicious external actor is imposing populism on Europe; it has emerged organically, fueled by real and widespread grievances. While those grievances are not exclusively economic, the geography of populism does fit that of the EU’s economic malaise: too many Europeans have been losing out for too long. So, if Macron fails to deliver on his promises, a Euroskeptic like Le Pen could well win France’s next election.
To avoid this outcome, Macron must be firmer than his predecessors in pursuing difficult but ultimately beneficial policies. He might take a page from former German Chancellor Gerhard Schröder’s playbook. In 2003, Schröder prioritized reforms over rigorous obedience to the EU’s Stability and Growth Pact. Additional fiscal leeway was needed to smooth the economy’s adjustment to the bold labor-market reforms that he was introducing. The decision to prioritize reforms over obstinate rule-following proved to be a good one.
Now is Macron’s Schröderian moment. He, too, appears to have opted for reasoned pragmatism over the blind implementation of rigid rules (which cannot make sense under any circumstances). Fortunately, policy principles are not written in stone, not even in Germany. Recall that the German government adamantly rejected the eurozone banking union and the European Stability Mechanism, both of which were ultimately launched (though some say it was too little, too late).
Europe is experiencing a seismic shift, with its political system being undermined from within (and becoming vulnerable to Russian pressure from without). Fear of the “other” and perceptions of trade as a zero-sum game are taking hold. These circumstances call for bold and committed action, not only by France, but also by Germany, which, ultimately, has the most to lose.