Can France drive EU reform? – HSBC

With his approval ratings down sharply, French President Macron is pushing harder for EU reform and Germany has recently sounded more receptive to France's plans, including a eurozone budget and finance ministry but member states may be unwilling to give away the fiscal powers needed to make a common budget powerful, explains the research team at HSBC. 

Key Quotes

“President Macron wants to kick-start eurozone reform …

Around 100 days into his presidency, Emmanuel Macron has seen his approval ratings plummet. Part of his response has been to push harder for EU reform, which he sees as vital to boost French prosperity and counter political populism.” 

“… with plans for a eurozone finance ministry and measures to defend trade

Mr Macron wants a eurozone budget and finance minister. A eurozone budget could be useful in galvanising the economies of the single currency bloc and providing a mechanism to smooth economic shocks hitting some states harder than others. The problem is that to do this successfully, the budget would have to be very large.  

While Germany has sounded cautiously receptive, it would likely demand member states to give away significantly more fiscal powers, which in turn would require treaty change. The lack of political appetite for this (not least in France) could pose a major stumbling block for Mr Macron's plans. Also, the degree of German support could depend on which parties form the next government after September's elections.  

On trade and globalisation Mr Macron wants to strengthen anti-dumping measures, introduce a 'Buy European Act' and better protect strategic industries from foreign takeover. We argue that while trade defence mechanisms are needed to ensure a level playing field, they should be used reluctantly and cautiously as they can be used as protectionist barriers. This risks retaliation and a loss of the well-known prosperity and productivity benefits from trade.”  

“Even with tentative German support, reform faces huge political challenges

While the challenge can't be overstated, we have long argued that the eurozone will only be put on a firmer footing if there is closer economic and financial integration between eurozone members. Over the next few months, we expect French and German common proposals to become more detailed, but we find it hard to imagine the eurozone's structural shortcomings will be solved swiftly.”