Merkel Signals Openness to Eurozone Reform -- Update

By Bertrand Benoit and Andrea Thomas Features Dow Jones Newswires

German Chancellor Angela Merkel for the first time sketched out the outlines of a bargain with France on fixing the governance of Europe's single currency, in the clearest sign yet that the two biggest eurozone countries are inching toward reconciling sharply different views on the matter.

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Germany could support two central French demands -- the appointment of a eurozone finance minister and the creation of a common budget -- if some conditions were met, Ms. Merkel told business leaders in Berlin on Tuesday.

"We can of course think about a eurozone budget as long as it's clear that this is really strengthening structures and achieving sensible results," she said.

In a striking softening of previous language opposing broader financial burden-sharing among member states, Ms. Merkel said "we could think about a common finance minister...if we aren't pooling liabilities in the wrong place."

As qualified as it is, Ms. Merkel's surprise overture on an approach long taboo in Germany suggests the stalled process of reforming the eurozone could kick back into life sooner than most experts had expected. It comes a month after pro-European Emmanuel Macron was elected French president, a win many see as evidence that the continent's political mood is growing more supportive of the European Union -- and a moment advocates of further eurozone reforms say should be seized.

An adviser to Mr. Macron said Ms. Merkel's apparent openness to reforms was "very positive," calling it "part of this new Franco-German climate of confidence."

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The chancellor's comments took even some German officials by surprise, coming ahead of a national general election in September. Berlin had refused to engage in detailed talks about the eurozone's future before the vote, insisting Mr. Macron had to prove his mettle first by enacting domestic economic measures over the summer.

Speaking before Ms. Merkel in Berlin, the head of the German Federation of Industry, Dieter Kempf, endorsed the idea of a common eurozone budget and finance minister "if these steps are correctly conceived." With such an approach, he said, "weak periods and imbalances could be countered early and the possibility of real crises further reduced."

The crisis that engulfed the eurozone in 2010 and is only beginning to dissipate laid bare deep defects in the currency union's design, including weak central control on public spending and the absence of incentives for countries to harmonize disparate economies. The eurozone also lacks the ability to raise and spend money in ways that could help buffer downturns.

The severity of the cash crunch forced several member states to seek emergency assistance from their peers and from the International Monetary Fund. It also nearly caused the bloc's weakest member, Greece, which remains under financial tutelage to this day, to drop out of the bloc.

The region has since equipped itself with a banking authority and a rescue fund for states facing liquidity shortages, but most experts agree much is left to be done to make the eurozone a sustainable construction.

Germany has long focused on tougher central controls on public spending and rejected jointly issued bonds, which Berlin thinks would encourage overspending by economically fragile members.

Under Mr. Macron, France has floated the idea of a joint eurozone budget to finance specific areas, such as unemployment insurance and infrastructure investment, across the region -- a notion anathema to Berlin until now.

Both countries have at different times suggested the appointment of a finance minister for the eurozone, though France sees that role as overseeing a common budget while Germany envisages a fiscal policeman.

Ms. Merkel's comments, however, suggest these two visions might be reconciled into a common arrangement combining tougher fiscal policing and some fiscal transfers between budget-surplus and deficit countries.

"This looks significant, especially about what it says about the state of mind," said Nicolas Véron, a eurozone expert at Bruegel, a Brussels-based think tank, of Ms. Merkel's comments. "It's a signal there is a will to find a constructive solution."

German officials say they have been reluctant to engage with Mr. Macron on eurozone reform ahead of Germany's general election because fiscal transfers are unpopular among the country's voters. And they say they are still skeptical about the novice president's ability to execute the tough domestic labor market reforms and spending cuts he campaigned on.

"We still need to see the evidence," one official said.

French officials say rather than directly confronting Ms. Merkel on recasting the eurozone, they are concentrating in talks with their German counterparts on shorter-term goals more understandable for voters, such as tightening regulations on temporary workers moving between EU countries. Progress on such issues would give momentum to meeting longer-term objectives for the eurozone, the adviser to Mr. Macron said, which is expected to be a central theme of a joint Franco-German cabinet meeting mid-July.

After last weekend's parliamentary election in France gave Mr. Macron's party a solid majority, recognition is growing in a skeptical Berlin that he may have the seats -- and political clout -- to deliver on his promises. Mr. Macron says he will move quickly to legislate changes to labor laws by the end of September.

German officials also see the appointment of Bruno Le Maire, an expert on Germany and a fiscal conservative, as France's economy minister as a sign that Paris is serious about engaging constructively on eurozone reform.

Since France and Germany have long sat on opposite sides of the spectrum of ideas about how to fix the eurozone, a Franco-German agreement could go a long way toward mapping out reforms acceptable to others.

German officials say one question will be the scope of a possible agreement, which could range from tweaks to the existing structure to the creation of a fully fledged finance minister's office and even a separate eurozone parliament.

The minimalist option could involve turning the region's rescue fund into a European Monetary Fund with stronger budget-oversight powers.

The more ambitious version would require an amendment to European Union treaties and therefore unanimous agreement among all 28 EU members -- an option German Finance Minister Wolfgang Schäuble has deemed "not realistic."

"What's clear is that a political window for eurozone reform will open after the German election," the German official said. "When it does, do we go for the more realistic, small-step approach or for the big vision?"

--William Horobin in Paris contributed to this article.

Write to Bertrand Benoit at bertrand.benoit@wsj.com and Andrea Thomas at andrea.thomas@wsj.com

(END) Dow Jones Newswires

June 20, 2017 15:50 ET (19:50 GMT)