Monday, 28 January 2019

The commitment to EU integration must not be underestimated

Wolfgang Munchau in The FT

Aachen is close to the Dutch city of Maastricht, which gave its name to what is probably the most important European treaty of modern times. The treaty of Aachen, signed last week by German chancellor Angela Merkel and French president Emmanuel Macron, is of a different category. But you would be wrong to underestimate its significance. This treaty will set an agenda, just as the Franco-German Elysée Treaty did in 1963. And agendas matter in European discourse.

If you want to think of an analogy, consider the Werner Plan. In December 1969, in the twilight days of the Bretton Woods system of semi-fixed exchange rates, EU leaders held a summit in The Hague to set up a working group to study monetary union. It was headed by Pierre Werner, Luxembourg’s prime minister at the time. Economists were right at the time to dismiss the discussion of a future monetary union as pie-in-the-sky, just as defence experts today are right to dismiss talk about a European army. The Werner Report was an unrealistic road map to a single currency. But it nevertheless managed to put this hugely significant policy agenda on the table. It was another 30 years until the introduction of the euro. But without this first, failed step, it would never have happened. 

One of the many reasons why the UK is leaving the EU has been a persistent tendency to underestimate such symbolism. Another is the entrenched belief that the golden era of EU integration is behind us. The widespread dismissal in the UK press of the Aachen Treaty is very much in that tradition. 

Being in denial about integration does not square with the facts on the ground. I have often criticised the German government’s handling of the eurozone crisis. But I have never had any doubt about Germany’s ultimate commitment to monetary integration. The Aachen treaty provides no concrete solutions, but at the very least it underlines that commitment. Germany and France say, essentially, that they will do whatever it takes. Like Saint Augustine before them, they just do not want to do it yet. 

But they may not be able to wait too long. The EU must make some fundamental choices on the future of its dysfunctional monetary union. In the decade since the financial crisis, many of the problems in both the real economy and the financial sector have been left unaddressed. The so-called banking union has failed in its principal objective to break the doom loop between banks and sovereign borrowers. Italy continues to bail out its banks. I expect Germany to do the same very soon. 

The latest economic indicators suggest that the downturn is going to be steeper than previously thought. If short-term interest rates do not rise above -0.4 per cent at the top of the economic cycle, you know you have a very sick underlying economy. The European Central Bank’s latest bank lending survey suggests that credit conditions are now beginning to tighten in Italy, while the Netherlands is suffering from a financial bubble. In other words, we are entering a period in which policy reform will soon be on the agenda. 

In the discussion on common defence, we may only be at the point where we were in 1969 on monetary integration. The external event to prompt a rethink in Berlin and Paris has been repeated threats by President Donald Trump that the US will leave Nato. Even in the unlikely event of this happening, Germany and France would not be in a position to create a joint army. Germany, in particular, is politically not ready; it spends only 1.2 per cent of its gross domestic product on defence, as opposed to France’s 2 per cent. The German constitution mandates that any decision to deploy troops has to be agreed by the Bundestag. Attitudes towards military engagement differ fundamentally between the two.  
Aachen will not shift German political views on defence. But I would not rule out that, over time, it could become more acceptable for a German government to raise defence spending targets — so long as this occurs in a European context. After the Werner report came a series of loose currency arrangements followed by the European exchange rate mechanism. The way to a common army is not only paved with good intentions but with many small steps, such as a pooling of defence procurement. 

In the preamble to the Aachen treaty France and Germany promise to take their “bilateral relations to a new level”. One day, while you are looking the other way, that will actually happen.

No comments:

Post a Comment