It’s spring in Paris, the sun is shining, the unions are on strike, and people are in the streets, protesting against Emmanuel Macron’s plans to make them work like les Anglo-Saxons. The Eurozone, like Macron, had a good 2017. But how deeply rooted are the green shoots of recovery, and what are their prospects of fruition?
Globally, economic growth is showing signs of decline after the synchronized upswing of 2017. The United States’ economy has now logged its longest expansion ever. China’s economic growth continues to slow. The forecast is for slower growth this year, and slower still in 2019 and 2020. Sooner or later, there has to be a recession.
On Wednesday, Eurostat, the EU’s statistics agency, announced that growth in the Eurozone has slowed from 0.7 percent in the last quarter of 2017 to 0.4 percent in the first quarter of 2018. This is a sharp decline, and it bodes badly. Last year, the Eurozone’s economy grew at 2.5 percent. This was its strongest showing since the pre-recession year of 2007, when growth reached 2.7 percent. The Eurozone took a decade to claw its way out of the Great Recession. The slowness of that recovery carried a social and political cost, including massive youth unemployment, the rise of nationalist parties across the Continent, and open hostility between the debtor nations of the Eurozone’s southern tier—Greece, Italy, Spain and Portugal—and the German-led austerity policies of the European Central Bank.
The slow recovery now looks like it’s also slowing down. The supply of fresh money from quantitative easing is running to a halt. The European Central Bank (ECB) has cut its bond purchases from 80 million euros a month to 30 million a month, and Mario Graghi, the ECB’s president, intends to stop bond purchases entirely in September. But in February, Peter Praet, the ECB’s chief economist, advised that the bond-buying should continue, because Eurozone inflation has consistently failed to reach the ECB’s target of 2 percent.
“Less supportive monetary policy conditions could imperil the inflation trajectory,” Praet warned in February. These are not the only causes for concern. Although the money-printing has been so extensive that there are now more Euro notes and coins in circulation than US Dollars, interest rates remain negative in the Eurozone. Europe’s banking system holds one trillion Euros of bad debt. The Eurozone’s industrial output has contracted since the start of 2018, including in Germany, the motor of the Eurozone economy. In February, German exports declined at the sharpest rate in three years.
Structural reforms in France and Spain have raised growth in both countries, and the economies of the Eastern European states still look healthy. But overall, the Eurozone’s feeble recovery from the Great Recession has depended upon money-printing and bond-buying, rather than the creation of conditions for long-term, self-sustaining growth. The problem is that the ECB and the European Union lack the political means to create those conditions.
In 2008, the political leadership of the Eurozone decided that the euro was too big to fail. Since its introduction in 2002, the euro had consistently underperforming in comparison to the U.S. dollar and the British Pound. But that, in the eyes of the European Union’s leadership, was a price worth paying. The creation of the Euro had confirmed that the measure of the European Union’s prospects was its currency, not its political institutions. So the Euro had to survive, at all costs.
The Euro survived the crash, and the sovereign debt crisis that followed. But the political leadership of the European Union, both the elected ones in the chancelleries of Europe’s nation states and the unelected ones in the EU’s imperial capital at Brussels, have been unable to restructure the Eurozone, politically and economically. The European Financial Stability Facility (EFSF), created in 2010 to assist European states with loans, is a temporary device. Just as the European Union is not the United States of Europe, the ECB is not the Federal Reserve.
Since coming to office in May 2017, Emmanuel Macron has called for the creation of a separate Eurozone budget, and a Eurozone finance minister with powers to command “currency transfers” from the ECB to member states. The main source of the budget would be Germany; in 2017, Germany had the largest current account surplus in the world, $287bn (7.8% of GDP). That means that Germany would expect to control the ECB. In turn, France could ask that the Eurozone’s finance minister was French.
On paper, this would place the Franco-German carve-up of the Eurozone on a more durable footing. It would also push the EU toward the political “convergence” that has been stalled since 2005. At first, Angela Merkel was mildly if non-specifically interested in Macron’s ideas. But her weak showing in last September’s federal elections has obliged her to dismiss them entirely.
Merkel and her Christian Democrats are caught between their conservative sister party, the Christian Social Union, and their coalition allies, the Social Democrats. The German public already resents the post-2008 transfers of Germany’s surplus to the weak economies of Europe’s south. A Eurozone finance ministry with powers to grant currency transfers would turn the temporary measures of the Great Recession into a permanent state of affairs, in which Germany’s surplus is drained by the Eurozone’s southern tier. So for domestic reasons, Merkel cannot afford to endorse Macron’s plans.
Nor does Macron have strong partners in the European Union. Britain is stumbling toward Brexit under a government that seems incapable of articulating its vision of Britain’s future economic relations with Europe. Theresa May has shed four ministers in just over six months; a record, and her only significant achievement so far. Italy has even less of a government than it usually does. A plurality of the vote in March’s elections went to parties whose only unifying principle is dislike of the European Union in its current form.
As the global economy slows, the structural vulnerabilities that nearly destroyed the Euro after 2008 will feel the stress. These vulnerabilities express themselves economically, but they originate in political weakness. In retrospect, the Franco-German partnership at the heart of the European Union should have established democratic accountability as the metric of the EU’s political health, rather than a prestige currency.
Macron’s failed pitch for fiscal centralization shows that the EU cannot continue as it is. Yet his high-handed warning that the nationalist governments of the Eastern European states are pushing Europe toward “civil war” shows that the EU elite has failed to absorb the political message of the last decade. Since 2008, the European Union has failed to respond to calls from member states for greater democratic accountability and transparency, and greater sensitivity towards voters’ concerns. Now, the EU cannot centralize fiscal policy in the Eurozone because of democratic opposition in its member states. That leaves the euro dangerously exposed to the coming slowdown, and even more so to the inevitable recession.
