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Analysis
Merkel tangle over refugees and reforms

Merkel tangle over refugees and reforms

German chancellor's weakness hampers Macron

by David Marsh in Paris

Wed 27 Jun 2018

German Chancellor Angela Merkel is caught in a tangle over refugees and euro area finance that resembles the plight of vessels stranded in the Sargasso Sea. Like a ship becalmed in the legendary seaweed-strewn stretch of the North Atlantic, Merkel is bereft of forward propulsion. Every manoeuvre results in countervailing forces that increase the sense of drift and isolation.

This is bad news for French President Emmanuel Macron. After years in the doldrums, Macron has brought new élan into Franco-German relations with a pro-European spirit and economic restructuring at home to help lower the widening competitiveness gap between the two countries. However, Merkel's problems first in assembling and then holding together a workable coalition following September's inconclusive general election have undermined the French president almost as much as the German chancellor.

Without a fully functioning German government able to implement joint European action, not least on economic and monetary union, Macron's own drive will falter. This could expose him to fresh electoral vulnerability at the hands of anti-European parties on the right and left. German policy-makers are keenly aware that lack of resolve in Berlin could fatally damage Macron. The adage of former West German Chancellor Willy Brandt holds true: not a strong but a weak Germany is the main danger for European stability.

Sunday's 'mini-summit' in Brussels, which failed in its aim of helping Merkel forge bilateral migration deals to neutralise a domestic political crisis, provided a foretaste of still more bitter exchanges in coming months. The linkage between immigration and euro reform will be on public and possibly acrimonious display at the 28-29 June European Union summit in Brussels.

Mutual recriminations over euro area rescue packages have abounded during the 2010-15 upheavals, with debtors criticising creditors' stringency and the creditors castigating debtors' ingratitude. These fault lines are now resurfacing over migration.

Europe's debtor nations, led by Italy and Greece, which have suffered most from EMU's long-running difficulties, bear the brunt of seaborne migration from trouble-torn areas of the Middle East and Africa. The creditor nations, led by Germany, represent the ultimate goal for many migrants, but they also attract resentment – and demands for funding – from frontline EU states that claim the rest of Europe has ignored their predicament.

Merkel and Macron have outlined plans for a breakthrough this week on measures to strengthen the euro, including transforming the European Stability Mechanism into a European Monetary Fund, build a funding backstop to help wind up problem banks, and establish an investment budget for EMU members. Worryingly for some top French officials, the measures contain a proposed mechanism for restructuring sovereign debt within the euro area that could directly affect the credit standing of overburdened countries like Italy. French officials believe this contains some of the hallmarks of the celebrated October 2010 acceptance by Merkel and then President Nicholas Sarkozy of private sector involvement in Greek debt restructuring in 2010. This move, according to leading officials such as Jean-Claude Trichet, then European Central Bank president, precipitated the European debt crisis.

The Franco-German measures make considerable sense. French policy-makers rightly say EMU needs more solid institutional underpinning to prevent the ECB again being called upon as a lender of last resort when the next financial crisis emerges, which could lead to still more central bank government financing that Germans find abhorrent. But, in view of Merkel's diminishing political hold, pushing ambitious integrationist proposals through the German parliament is becoming increasingly arduous.

German voters are interested above all in Merkel negotiating effective restraints on migrants entreating the country, even though numbers have greatly declined since 2015. Extending the ESM, or agreeing an investment budget for EMU countries, brings Merkel no positive headlines at home.

Most seriously, Merkel's Christian Social Union has called for migrants who have claimed asylum in another EU country to be rejected at Germany's borders. Merkel has given herself a short deadline to negotiate bilateral deals to achieve this, although the idea was publicly torpedoed on Sunday by Guiseppe Conte, the Italian prime minister, who launched a 10-point plan to rewrite 25-years of EU asylum policy. Merkel's dilemma is that any concessions she agrees with the CSU will be anathema to the southern European states, and vice versa.

This time round, the southern states may have the upper hand. The paradoxical effects of Merkel's weakness are not lost on Alexis Tsipras, the Greek prime minster. Asked in London on 26 June about the German chancellor's political position, Tsipras said political leaders had sometimes to suffer 'political costs' in the cause of Europe – just as he did in 2015 by electing to keep Greece in the euro.

David Marsh is Chairman of OMFIF.

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