Macron looks East

Discussion and Analysis by Charles Porter:

It is well known that France’s President Emmanuel Macron is a pro-integration Europhile. In fact, the mandate upon which he assumes government is intrinsically linked with his profile vis-à-vis the European Union and future of the Eurozone economy. Germany is an especially critical member of the Eurozone economy, alongside France. Therefore, the next Chancellor of Germany will have significant consequences for Macron’s Eurozone reform and development program.

Contesting the second round of the French Presidential Election against Marine Le Pen, a staunch Eurosceptic, Emmanuel Macron’s position with respect to Europe took centre stage. His track record and future intentions both dictate a stronger relationship for France with the rest of the Eurozone political economy. The revelation within the Financial Times, therefore, that Emmanuel Macron will attempt to assert immediate influence over the path of Eurozone and European Union integration following the German election is bold, yet expected.

Macron is quoted to be pursuing a ‘a budget of “several percentage points” of GDP’. Although the volume of the future budget remains ambiguous, it still necessarily several times larger than the present budget which fluctuates around 1 percent of EU Gross National Income. Macron’s suggestion is important for both the election and the inevitable subsequent negotiations regarding the composition of the future German government.

A large European budget is requested because it can act as a stabilisation function within the Eurozone economy. This may have the capacity to ensure stability either in good times, by making it a more optimal currency area, or, in bad times, by counteracting the vulnerability and enhancing the flexibility of the single currency. Because the European sovereign debt crisis ultimately centred upon a few countries yet became macroscopic because of the Union, this new provision could prevent future crises.

Macron’s timing is interesting. Clearly not wanting to be accused of election tampering, the article in the Financial Times quotes government officials as wishing to engage with the new German coalition next week, after the vote. However, it would be naïve to think that Macron’s positioning towards Germany, its Eastern neighbour, won’t influence the minds of voters considering the Eurozone a salient political phenomenon, positively or negatively, and concerned, or apathetic, about European harmony.

Chancellor Angela Merkel has already signalled her willingness to work towards Eurozone and Union reform in conjunction with Macron. However, her priorities and motivation for Eurozone reform are more targeted towards tangible benefits thereby creating a disharmony between French and prospective German integration preferences. Crucially, she has consistently expressed an unwillingness to wildly commit fiscal resources towards either the Union or Eurozone economy. Given that whatever the composition of the new Eurozone budget is, Germany will be a highly significant contributor. Therefore, extremely intelligent regulatory design would be necessary to ensure the Germany is not a consistently net creditor. Despite this possibility, political willingness and German voters may preclude Merkel’s Germany from committing to Macron’s reforms.

Martin Schultz, on the other hand, joined the Social Democratic party following his presidency of the European Parliament (EP). An embedded characteristic within the SPD leader is, therefore, European integration. Schultz, when still speaking as the EP president, commented upon the propensity for the secession of the UK from the Union to create an environment where unprecedented integration may take place. The support, or at least ambivalence, of the SPD leader for integration to the degree that Macron envisages means that voters should internalise Schultz’s willingness to pursue such a fund. The present German orientation of the affairs of the French president are therefore highly salient to the election result and the minds of German voters casting their ballot this Sunday.

The implications for the foreign exchange market are extensive. Whilst a large common Eurozone budget is advocated for its influence upon economic stability, currency fluctuations will depend upon market’s perception of the fund. For example, markets may perceive the political impasse that a common budget may create as damaging to European solidarity and extant integration. Should Schultz’s SPD achieve a meaningful role within the German government, the new budget could be more plausible. Therefore, the reaction of markets following this event will, to some extent, reflect the degree of stability, or instability, that the Euro will receive from new European integration.