Title picture: What’s next for EU economic integration after Merkel?

What’s next for EU economic integration after Merkel?

Chancellor Angela Merkel will leave behind her a different snapshot of Europe from the one she found in November 2005 when she took office. Among these new challenges, the EU is still facing the completion of the reforms enacted after the 2008 financial crisis to safeguard stability. The Banking Union, which seeks to respond to the problems emerged during last decade’s sovereign debt crisis, remains incomplete and the contentious framework for fiscal policy coordination is increasingly under scrutiny as the pandemic places additional weight on the future of EU economic prosperity.

The successor of Angela Merkel will inevitably have to shape the position of Germany on topical questions on the future of Europe such as the reform of its economic governance and the completion of the Banking Union. The issue has always been a thorny one for Germany and its position is that further progress on the Banking Union, as demanded by mostly southern European Member States, is conditional on further risk reduction measures. Consequently, when German citizens will head to the polls in autumn, they will not only choose a mere domestic policy stance but will also set the future trajectory of European integration.

General government gross debt in euro area countries rises significantly in response to the COVID-19 pandemic

General government gross debt in euro area countries rises significantly in response to the COVID-19 pandemic (Source: European Commission / May 2021).

As we enter the recovery phase from the pandemic, in a world with soaring public debt levels and unclear prospects for banks’ balance sheets, the future Chancellor will immediately have to contribute to the debate on EU’s fiscal, financial and economic integration. After 16 years, we find ourselves wondering how the main options on the table in September could influence the future direction of European economies.

1. Continuity with a pro-EU flavour

Armin Laschet, the CDU Chancellor candidate, represents continuity with the platform of his predecessor Angela Merkel. As a member of the same party, Mr Laschet notably prefers fiscal moderation to generous spending and might continue the path set out by the incumbent Chancellor. Like his predecessor, Mr Laschet will likely continue to reject any form of debt mutualisation and risk sharing among EU Member States.

Nevertheless, from a European perspective, he appears more prone to take additional steps towards further integration. Mr Laschet has not restrained from showing his discontent over Angela Merkel’s reticence towards wide centralisation at the European level. A big supporter of the Franco-German engine in Europe, he criticised Ms Merkel at the 2020 Munich Security Conference for the lack of ambition and reactive approach towards the proposals presented by French President Emmanuel Macron.

Armin Laschet, the CDU Chancellor candidate, represents continuity with the platform of his predecessor Angela Merkel

Armin Laschet, the CDU Chancellor candidate, represents continuity with the platform of his predecessor Angela Merkel (Source: Olaf Kosinsky / CC BY-SA 3.0).

With France holding the Presidency of the Council of the EU in the first half of 2022, however, Mr Laschet could find himself having to prove his ambition on EU affairs at the very onset of his potential Chancellorship. With recent reports suggesting that France might be seizing the opportunity to scrap the Maastricht criteria on public indebtedness and Italian PM Mario Draghi calling for a reform of the European framework for fiscal coordination, the Stability and Growth Pact (SGP), Mr Laschet might have to rapidly outline his stance on the pressing question of fiscal reform in the euro area. Unlike his French counterpart, the leader of the CDU/CSU seems inclined to support the swift reintroduction and strengthening of the SGP rules through a tougher stance against deviations from the stability criteria.

At the same time, Laschet would take office in parallel to the Conference on the Future of Europe, where he would have the opportunity to promote his preferences for broad-ranging amendments to the EU institutional set up with the final goal of a European Constitution. This could include further empowering the European Parliament with the right of legislative initiative, which remains mainly a prerogative of the EU’s executive, the European Commission, where instead the CDU/CSU might be looking to reduce the number of Commissioners.   

Mr Laschet would also promote the strengthening of the Spizenkandidaten process to elect the President of the Commission while calling for majority voting in Council in key policy areas to accelerate the decision-making progress by limiting the use of unanimity. He seems to be willing to make EU decisions ‘Chefsache’, implying that policy stances on EU affairs would be defined at the top political level and reflect his personal preferences

A coalition with the Greens could facilitate fiscal reform but ultimately, as the German public opinion might not see additional fiscal and banking centralisation in Europe under a positive light, the question of how far he is willing to go to demonstrate his ambition on EU integration remains unanswered.

2. The green alternative

Annalena Baerbock is the candidate to the Chancellorship position of the Greens, a party that in recent times has risen to become the main contender for the CDU/CSU hegemony of the past 16 years. Their ‘tête-à-tête’ in the polls could be relevant as the Greens might secure a large share in a potential government coalition in September, where they could advance some of their most ambitious policies.

The Greens are running on a platform which is promoting the acceleration of the process of European integration through contentious reforms, including the completion of the Banking Union. While advocating for tighter regulations for banks, the game-changer proposals on their manifesto include establishing a permanent fiscal capacity in the EU together with a European Monetary Fund.  The idea of a budgetary union is highly controversial among the German public and was always rejected by Chancellor Merkel, who recently called the joint issuance of European debt to finance the Next Generation EU recovery fund a one-off exercise.

Annalena Baerbock, candidate to the chancellorship position of the Greens, could welcome a more lenient stance to divergences in fiscal positions among EU Member States

Annalena Baerbock, candidate to the chancellorship position of the Greens, could welcome a more lenient stance to divergences in fiscal positions among EU Member States (Source: Heinrich Böll Stiftung / CC BY-SA 2.0).

Coherently with policy proposals at the domestic level, such as the reform of the debt brake limiting the levels of German public spending, the Greens could also welcome a revision of the rules of the Stability and Growth Pact by adopting a more lenient stance to divergences in fiscal positions among EU Member States with the goal of supporting investments, reducing inequality and promoting sustainability.

Annalena Baerbock could further agree on the establishment of a deposit insurance scheme for the Eurozone, which remains an outstanding element of division among EU capitals, partly also due to the German position which sees it as a threat to its Sparkassen model which have their own deposit insurance scheme.

Whether she will get the Chancellorship for the first time in the history of her party or will play a crucial role in the formation of a government coalition, the question is to what extent Ms Baerbock will be able to rally other parties behind these proposals, which have long been a red line for the conservatives.

 3. The experienced Bundesfinanzminister

Olaf Scholz, current finance minister and leader of the Social-Democratic Party (SPD), represents the intermediate vision between the CDU/CSU’s and the Greens’ proposals on EU economic and financial integration.

During the pandemic, he made a name for himself as one of the architects of the EU recovery plan, which he described as a “Hamiltonian moment” towards the establishment of a permanent fiscal capacity in Europe. This is indicative of a sharp distinction with the conservative view opposing a budgetary union at the European level. Yet, while appearing sympathetic to the goal of increased EU integration, the finance minister has shown little divergence from the policies of his predecessors in past Merkel governments and eluded questions on the reform of the Stability and Growth Pact.

Olaf Scholz, current finance minister and leader of the Social-Democratic Party (SPD), represents the intermediate vision between the CDU/CSU’s and the Greens’ proposals on EU economic and financial integration

Olaf Scholz, current finance minister and leader of the Social-Democratic Party (SPD), represents the intermediate vision between the CDU/CSU’s and the Greens’ proposals on EU economic and financial integration (Source: Thomas Trutschel for the Federal Ministry of Finance).

His position on the Banking Union is representative of his middle-way stance on European integration. Slightly less than two years ago, Olaf Scholz captured the attention of policymakers in Brussels when in an op-ed for the Financial Times he stated that “The need to deepen and complete European banking union is undeniable”, opening up to the creation of common insolvency and resolution procedures for banks on the example of the US Federal Deposit Insurance Corporation (FDIC). Perhaps even more relevantly, he also welcomed some form of common European deposit insurance scheme, the so-called missing pillar of the Banking Union, which has been paralysed in a political deadlock.

Already back then, he received some internal criticism for lacking more ambition, possibly due to the emphasis on risk reduction, typical of his CDU predecessor Wolfgang Schäuble. Two years later, he seemed to have achieved little progress on his suggestions for the completion of the Banking Union and it is now quite unlikely that Eurozone finance ministers will agree on a timebound roadmap to complete the Banking Union in June. Discussions among Member States remain gridlocked and Mr Scholz, at this stage, might not be willing to undermine his position by promoting more ambitious reforms to the detriment of the SPD’s performance in opinion polls.

Given his track record during his tenure as finance minister, it is unlikely that Scholz would promote high levels of discontinuity. The outstanding question is whether, as a Chancellor or as a member of a less likely ‘traffic light coalition’ with the liberal FDP and the Greens, he could promote a moderate vision of economic integration among EU Member States, with higher degrees of mutualisation but hinging on the traditional paradigm of risk reduction as a precondition.

The German elections are likely to change the domestic political constellation, but it is unclear if they can erase past taboos on the way forward in Europe. Undoubtedly, whoever will emerge as the next German leader will have big shoes to fill to help the EU find an answer for the challenges on the horizon. As we head to a post-pandemic world, the choices of the future German government are likely to have long-lasting consequences well-beyond national borders.

Giacomo Loi works on prudential regulation and banking. Before joining FleishmanHillard, Giacomo worked as a research analyst at the Economist Intelligence Unit advising governments and companies on public policy issues. He also worked in the Cabinet of the President of the European Parliament David Sassoli, where he reviewed major economic and budgetary legislation following the COVID-19 pandemic. He holds a BSc in Economics from Bocconi University and an MSc in Political Economy from the London School of Economics. He is fluent in English and Italian, and has an intermediate knowledge of French.

Giacomo Loi

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