Macronomics

In a recent fascinating interview with The Economist, French President Emmanuel Macron reiterated his long-held view that the EU has to adapt if it is to survive in a much-changed world. As Macron noted, things that were unthinkable five years ago are now the norm and that “if we don’t wake up … there’s a considerable risk that … we will no longer be in control of our destiny.” It is hard to disagree with this: The historically strong relationship between the US and Europe has become less anchored in recent years, initially as a result of Barack Obama’s pivot towards Asia and more lately thanks to Donald Trump’s retreat from rational policymaking. Since the EU is unable to rely on the US to help deal with the rise of China as a world power, whose interests do not chime with those of the EU, Macron believes that European nations have to act proactively in their own interests.

Whilst most European leaders would profoundly disagree with Macron’s assertion that NATO is “brain dead”, at the very least it should act as a rallying call for Europe to think about its place in the world. This week’s NATO summit in London was a chance for western leaders to get together, which is useful in itself, and even though no great decisions were taken it appears to have passed off cordially enough (the ongoing spat between Donald Trump and Justin Trudeau notwithstanding). But although forward-thinking European politicians will have to rethink what kind of Europe they want, there simply are not enough politicians who share Macron’s vision. Germany may be the economic powerhouse, but Angela Merkel is coming to the end of her tenure as Chancellor and her coalition government is more fragile than it was following the election of the Borjans-Esken duo as leaders of the SPD, both of whom are opposed to continuing the coalition with the CDU/CSU. Nor is the German economy currently in great shape as the economic motor splutters in the wake of the US-China trade dispute. The bottom line is that we should not expect Germany to contribute much to reshaping the EU in the next couple of years – like many countries, it is too preoccupied with domestic political issues.

But the problem is more than just political: The EU will have to focus on the kind of economic model it wants to pursue in future. As I pointed out long before the Brexit referendum, the EU has benefitted from the market-oriented model designed to enhance competitiveness which the British have helped to push in Brussels. However, the UK’s departure will significantly change the nature of the EU. For one thing it will change the balance of voting power. Around 80% of EU laws are ratified by qualified majority voting, meaning that they must be passed by 55% of member states representing at least 65% of the total EU population. Germany, the Netherlands, Austria and Finland, together with the UK, currently represent just over 35% of the EU population which gives the northern nations a blocking minority on policy matters. This will change once the UK leaves and concerns have been expressed, particularly in Germany, that countries opposed to market-oriented solutions could press for a weakening of EU competition policy, which has traditionally been dominated by ideas from the northern countries. This in turn would weaken the EU’s economic competitiveness.

Then there is the nature of the economic difficulties facing France which are likely to sap Macron’s energy to pursue EU-wide solutions. The latest wave of public dissatisfaction revolves around reform of state pensions, which has met with huge resistance and a wave of strikes brought the transport sector to a virtual standstill earlier this week. There is no doubt that an overhaul of the state pensions system is required, since it offers very generous state payouts to workers in certain sectors (railways, merchant seamen, energy workers and some niche workers at the likes of the Banque de France and l’Académie Française). Drivers on the Paris Metro, for example, are able to retire at 52 with an average monthly pension of €3500 whereas private sector workers, who retire at 62, receive only €1360 per month. All told, these special provisions cost the taxpayer €8bn per year (around 0.3% of GDP).

We have been here before, of course. A year ago, Macron’s efforts to impose a carbon tax met with huge resistance in the form of the Yellow Vest protests, which prompted him to put the policy on hold. Efforts in 1995 to reform the French economy were abandoned in the face of massive public protest. As the population ages, the state simply cannot afford to underwrite special privileges for any one group but it is a hard sell to get the electorate to understand that a system that has worked for the last 70 years will not fly in the 21^st century. I have a lot of time for Macron’s ideas but I do not believe that he will be successful in delivering domestic reforms on the scale he desires – there is simply too much resistance. This is not to say that he will not be partially successful – after all, things have changed since 1995 – but it may be left to a future generation of politicians to get where he wants to go. 

All this matters because Europe does not have the luxury of time to decide in which direction it wants to go. Indeed, the more I see how slowly reform is proceeding in France and Italy, the more I am convinced that the EU will be forced to concede that not all countries will be able to move forward at the same pace. Ironically this is the form of EU that the British would have been more comfortable with than the push towards a federalist system that grew out of the hubris of the 1990s. But as the world moves towards a world in which the US and China act as the poles of the geopolitical system, Europe cannot simply afford to pick one side. And this is where Macron is right – US and European interests are diverging, and the EU will have to steer its own course. NATO has to stand for more than “No Action, Talk Only”.