How Merkel caved to Macron

Redistribution will not cure Europe’s ailments.

Josef Joffe serves on the editorial council of Die Zeit in Hamburg. He is also distinguished fellow of Stanford’s Hoover Institution.

HAMBURG — Once the uncrowned empress of Europe, Angela Merkel has finally caved to France’s Emmanuel Macron.

Ever since Macron captured the Elysée in 2017, the German and French leaders have been locked in silent combat over Europe. Merkel stood for reformist vigor and fiscal virtue: no bailouts, no eurobonds and keep your hands out of our coffers. Macron preached spending, redistribution and centralization.

Now it seems the coronavirus crisis has delivered victory to Paris. Macron and Merkel’s joint unveiling of a European recovery fund worth half a trillion euros to bail out the sinking EU economy will remake the bloc in France’s image, turning Europe into a continent-sized welfare state.

The new recovery fund signals an unprecedented power shift from 27 sovereign nations to the European Commission. This unelected body will borrow hundreds of billions and, in the name of “European solidarity,” hand them over as gifts, not loans.

How will the mammoth debt be repaid? We’ll worry about that later. Who would feed at the trough? A large part will go to the usual suspects, known as “Club Med” or the “Olive Belt” led by France — a pre-destined beneficiary of the coming cash bonanza — and running from Lisbon to Madrid, Rome and Athens.

This power shift recalls America’s fabled “Alexander Hamilton moment” of 1790 when the Feds assumed states’ debts piled up during the Revolutionary War. The first Treasury chief’s generous gesture came with hardball politics, laying out the road to ever-more power for Washington.

As Hamilton, so Macron: The idea is to spread the wealth and fatten the center. Add Merkel who muses: “Alone, the nation-state has no future.” Onward and upward for the United States of Europe.

There are good reasons however, why such a move has been resisted until now.

As ostensibly compelling it may be, the U.S.-EU analogy falls flat. The differences are glaring. Unlike the 13 ex-colonies, the EU27 cannot rely on a common history, language and culture. They’ve been around, as separate identities, since the Roman empire. After crystalizing into nation-states circa 1500, they have fought to the death whoever tried to unify Europe under his knout, from Habsburg to Hitler.

Today, war may be out, but sovereignty is still in. France will not cede the scepter to Germany, and vice versa. The rest will not defer to the duo, nor to Brussels. Since the start of the pandemic, in fact, the nation-state has reasserted itself, as countries close borders and coddle sickly national industries.

And then there’s the harmful incentives the recovery fund creates, given the eurozone’s current composition (and the varying willingness to reform among its members).

Jaundiced economists warned from day one that a common currency requires a real state based on nationhood and obligation. Absent such overriding attachment, how could Brussels take from Peter in Berlin to give to Paolo in Rome?

Under the euro, capitals must part with sovereignty over economic policy, a pillar of the nation-state. The price is cruel. States can no longer devalue to stay competitive, for francs and liras are gone. Instead, they’re told to stop splurging and borrowing to buy off powerful domestic interests like public sector unions. They have to get their house in order with painful market reforms that replace short-lived relief with solid growth.

France and Italy, No. 2 and No. 3 respectively in the EU’s GDP ranking, have not swallowed the bitter medicine. Instead, they have continued to rack up debt along with the rest of the Olive Belt. After all, why swallow it when you know you no longer have to pay a hefty devaluation premium under the solid-gold euro? Pocket the cheap money instead.

As deficits and debts soared, the logical next step was a “transfer union.” Eager to get into the EU kitty, they preferred the dole to more debt.

Meanwhile, Austria, the Netherlands and the Scandinavians gathered around the German CFO to insist on reform-minded fiscal discipline. The result has been a 20-year power struggle, in which communal virtue kept grinding up against national egotism.

Now, suddenly, Merkel has openly broken ranks, sacrificing Teutonic rigor to Macron’s Gallic ambitions. But if you look to the euro’s tortured history, this is not all that surprising: For years, profligacy has trumped prudence.

Ever since European Central Bank chief Mario Draghi famously vowed in 2012 “to do whatever it takes to preserve the euro,” the ECB has dodged the treaty constraints. And behold: At each point, those brutal, arrogant Germans fussed and fumed — and then paid up.

The “Club Med” countries got the message: Berlin, which profits most from integration, will not let the project sink.

Merkel’s new tune is not as revolutionary as it sounds; it just formalizes routine practice. Sure, the so-called frugals are not amused, but they will be bought off. The recovery fund will kick in, as have all the other rescue mechanisms since Greece went bankrupt.

So, let’s hold the applause for the Franco-German “engine.” Its recovery fund is where short-term relief trumps Europe’s long-term needs. Why will national governments go up against entrenched interests and pay a murderous political price at home to clean up their economies if they can haul in hundreds of billions for free?

The harsh truth is that a mountain of free cash will not be enough to cure Europe’s ailments. Those predate the coronavirus pandemic.

For Europe to rise again, it will have to do more than transfer riches from north to south. The cure is not redistribution, but restarting the engine of growth.

Don't count on Macron, who has been foundering against the armies of the status quo since he took office. Nor on Merkel, who has given up coaxing the EU into market-driven rejuvenation.