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The Wild Card In The New Eurozone Budget Agreement

Euro

Ahead of the European Union summit scheduled for June 28-29, German and French leaders agreed on Tuesday to create a budget for the euro zone in an effort to boost the bloc’s economic competitiveness. But even though German Chancellor Angela Merkel is the default leader of the bloc, with French President Emmanuel Macron her extended arm, they’ll still butt heads with a new right-wing Italian government on this.  

The euro zone barely survived the 2009 debt crisis, and since then, the bloc has continued to disintegrate, but Merkel and Macron say this new agreement will open a “new chapter”.

And the budget deal aims to help “keep Europe from becoming more divided”.

Macron is keen to see a much more integrated Europe. He wants a single defense budget, an EU defense force and a shared budget for eurozone countries.

But the two aren’t necessarily in lockstep on what happens next. Merkel is much more cautious about integration and the risk-sharing a big eurozone budget might bring with it. And the timing is bad for Merkel, who is playing a fragile political game at home after interior minister Horst Seehofer threatened to abandon the government coalition.

So for now, we’re looking a deal signed but very vague on the details, which will have to be negotiated with the bloc’s 17 other members.

The “new chapter” is more like a long prologue to … something.

The agreement resulted in an eight-page declaration titled 'Renewing Europe's promises of security and prosperity' which the European Commission President Jean-Claude Juncker called “very well balanced”. “I am very pleased with the German-French paper. It allows European progress and the Commission is very pleased with what is being developed,” Juncker said.

The German-French alliance has really delivered fantastic reforms in the past, argue critics. Related: Tax Reform Could Push U.S. Profits Abroad

"Everything depends on the details that are not yet known," said Guntram Wolff, director of the Brussels-based think tank Bruegel. "But without finishing the banking union, the euro area will remain fragile.”

Indeed, Europe’s banking system is highly fragmented, and as a result, it suffered more significantly from crisis than its U.S. counterpart.

Merkel said the primary purpose of the budget, which could go into effect in 2021, would be to fund “investments and convergence measures”, while Macron was promoting his earlier idea of including some form of “governance” — which media are interpreting as a possible call for a finance minister to govern it all.

While eurozone countries would determine the overall strategy for the budget, the European Commission would administer it.

There aren’t any numbers involved yet—and that, of course, is the really contentious part. Nor is it likely to be anything close to Macron’s initial dream of a figure in the hundreds of billions of euros, while Merkel has lobbied for something in the “lower double-digit billion range”.

In the meantime, there’s Italy.

Italy is dancing with euro zone disaster here, with its new right-wing, populist government threatening an exit that could have a major ripple affect across the bloc. And it will take much more than a Merkel-Macron 8-page ‘paper’ to cover up this wound and stop the bleeding.

As Politico.eu opines: “You don’t need to be a populist to recognize that Europe’s monetary union is dysfunctional and in dire need of more substantial reforms than those proposed by Germany and France.”

By Damir Kaletovic for Safehaven.com

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