Eurozone: shaken not stirred

Eurozone: shaken not stirred

10-10-2017 | Column

Has a euro crisis become less likely? “The wind is back in Europe’s sails,” declared European Commission president Jean-Claude Juncker in his latest State of the Union before the European Parliament. And he took advantage of the opportunity to push for the European Union taking a more federalist direction.

  • Léon  Cornelissen
    Chief Economist

It is easy to underestimate Juncker and to pass him off as just an eccentric, antediluvian and largely irrelevant touchy-feely drunkard or an old-school Europhile and an unlikely agent for change. Who knew the old man had so much spunk in him?

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The vision thing

Some of Juncker’s more outrageous proposals, like merging the offices of the president of the European Commission and the European Council were immediately and predictably dismissed by the usual suspects, Denmark and the Netherlands. Dutch Prime Minister Mark Rutte has declared Juncker a romantic. “I am more of a ‘when you have visions, go see a doctor’-kind of guy.” This reminds me of when former US President Bush was said to lack “the vision thing”, that is, clear ideas and principles that could shape public opinion. It’s not exactly a compliment, I’d say.

But since Brexit, the Dutch have clearly been on the defensive: they fear almost complete domination by France and Germany in a political union and are mourning the loss of Britain with its free market instincts as a counterbalance. Their political punch (the largest of the smaller members) has diminished since the incorporation of eastern European countries in the Union (Poland is the ‘rising star’). No one is excited about the inevitable expansion of the EU to include the troubled countries of the western Balkan, a topic also addressed by Juncker. Reminiscent of their usual criticism of ECB policies, the Dutch are behaving as anxious rentiers.

‘The dogs bark, but the caravan moves on’

The dogs bark, but the caravan moves on. Merkel’s chief of staff called it an “important and great” speech. Change is in the air. The new French president Macron has won his first battles on the street to push through labor market reform: the unions were divided. Supply side reform in France is a necessary condition for German approval of initiatives to strengthen the architecture of the euro.

No definite solution for the Eurozone

A definite solution remains elusive: for example, Germany continues to resist approving a Eurozone-wide deposit guarantee system and a sufficiently large central Eurozone budget (a couple of percentage points of Eurozone GDP as suggested by Macron would be the minimum amount required, but they are still resisting). Some suggest that the German push for a kind of European IMF will be used as an excuse to oppose any fiscal transfer by other means should the need arise. Not that it matters in the shorter run. The cyclical recovery in the Eurozone is even lifting the Italian boat.

Though Forza Italia’s Berlusconi (speaking of antediluvian figures) has reintroduced his older proposal for a parallel currency system, other parties are downplaying their Euroscepticism, as they are no longer eager to make it a major issue in the upcoming elections, now that the economy is recovering and the problems in the banking sector have disappeared from the headlines. The Five Star movement has now called its earlier proposal for a referendum on the euro a measure of last resort. The Lega Nord has also toned down its rhetoric.

Indeed, a euro crisis in this cycle has become highly unlikely, but Europe and the Eurozone remain a work in progress.

This column was first published in Robeco Quarterly (September 2017)

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