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Analysis
Germany's Macron dilemma

Germany's Macron dilemma

French ties and awkward compromises

by David Marsh in Berlin

Fri 18 Aug 2017

Germany's quest for ever closer ties to France after Emmanuel Macron's rise to the presidency could drive Berlin towards some awkward compromises after next month's German parliamentary elections, when Chancellor Angela Merkel is expected comfortably to retain power.

Germany has 'no alternative' to a revival of the partnership with France, as one leading German minister puts it. No one would be surprised if Macron, whatever his pro-European credentials, were to drive a hard bargain in fields ranging from euro area economic stimulus to decisions on top jobs at the European Central Bank, the European Commission and European Council.

The disturbed world environment brings both good and bad news for Merkel. On the positive side, political instability elsewhere – and especially the misadventures afflicting Donald Trump in the US – strengthen Merkel's position on the world stage as well as her incumbency in Germany. She is well ahead in the polls against Martin Schultz, her election rival from the Social Democratic Party and present, if somewhat reluctant, coalition partner.

More negatively, with the US on a unilateralist course, Britain at least temporarily relegated by its European Union exit, China taking a harder line on key economic issues, and Russia still out of bounds politically over Crimea and Ukraine, Germany has few foreign policy options. Berlin is being forced ever further towards France – even though some of Macron's policy prescriptions may not always be palatable to Berlin.

The dilemma is heightened by the ending of Macron's political honeymoon after his May election win. A fall in his poll ratings and challenges from the military, teachers and local authorities over proposed budget cuts have dulled his victory. Merkel's government generally has been relieved by Macron's ascent. His recent weakening has increased Macron's opportunity for pressing Germany to make concessions in key areas to ward off a rekindling of support in France for populist anti-EU parties.

Macron believes he has a legitimate case in asking Germany for more flexibility over respecting EU rules for limiting the budget deficit to 3% of GDP. Complex bargaining is due over the ECB succession, where Jens Weidmann, the Bundesbank chief, has been put forward as a possible replacement for President Mario Draghi in 2019 – but where Governor François Villeroy de Galhau from the Banque de France is also a contender.

One area for potential disquiet is Tuesday's ruling from the German constitutional court that the ECB's €2tn quantitative easing programme may violate EU law. An anti-QE case is being referred to the European Court of Justice.

The action perpetuates legal ambiguity for at least another year – even though the ECJ is expected to decide in the ECB's favour. The uncertainty may either contribute to the ECB winding down QE more quickly than expected, or delay it because of worries about the potential effect on heavily indebted countries like Italy. Either way this has implications for the Bundesbank's own bond-buying, where it has been purchasing fewer German government bonds than strictly required because of shortages of available paper.

Wolfgang Schäuble, Germany's finance minister, has publicly defended the ECB's action. The government's view, though, is that the court decision makes more necessary a relatively speedy return to monetary orthodoxy.

On Brexit, Schäuble says the UK has been surprised by the EU solidarity triggered by the British decision – something he, too, did not expect. With the Commission saying this week that the UK's position papers on citizens' rights and a financial settlement are 'a positive step' in Brexit negotiations, Schäuble expressed the growing mood in Berlin that a softer Brexit is likely.

Although he stressed the difficulties ahead, Schäuble says he wishes to do everything possible to lower damage to the EU and Britain. Latest developments seem to have confirmed the view before the 2016 referendum from Chares Grant, director of the Centre for European Reform, that exit negotiations would be eased by a more arduous post-referendum passage for the UK economy – because leading EU states would no longer fear that others would follow the British example and wish to head towards departure.

David Marsh is Managing Director of OMFIF.

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