Europe Expresses Caution on Macron's Reform Ideas -- Update

Europe on Monday cheered Emmanuel Macron's French presidential victory on a platform of domestic economic reforms and greater European integration, but it added a caveat: Show us that you mean it.

Mr. Macron has pledged to energize France's drowsy economy with tough fiscal and labor market reforms. But he also wants the 19 countries that use the euro to pool budget resources and Germany, the bloc's heavyweight, to spend more to support the regional economy.

On Monday, European officials said Mr. Macron would have to deliver on his part of the bargain before he could expect a quid pro quo -- if it comes at all.

While they expressed relief at the defeat of Marine Le Pen, Mr. Macron's euroskeptic challenger, government officials in Brussels and Berlin said they would be watching the president-elect's moves in France closely for signs his promises of domestic reform are credible before making any concessions of their own.

The wait-and-see posture, some said, underlined the loss of credibility suffered by successive French administrations that all promised serious economic reforms and tighter spending but often failed to follow through, resulting in repeated breaches of European Union government spending rules and leaving persistently high unemployment.

Mr. Macron's requests from his future partners include a common eurozone budget, financed by jointly issued bonds, to stimulate growth via infrastructure spending. By virtue of its size, Germany would be the bonds' main underwriter, something German politicians have long rejected as effectively taking over other countries' public debt.

German Chancellor Angela Merkel on Monday praised Mr. Macron for his "courageous, pro-European campaign." But when her spokesman was asked about eurobonds -- jointly issued bonds with shared liability -- at a regular government news conference, his reply was terse: "The German government's negative view of eurobonds remains in place."

Instead, Ms. Merkel and her conservative allies in Germany suggested the onus would be on Mr. Macron and his future government to first make unpopular changes at home. Those changes would be for the good of France, they said, and shouldn't be viewed as the outcome of German prodding.

"Given the situation that we have in Germany, I don't think we must now give priority to changing our policy," Ms. Merkel said. "German support can of course be no substitute for French policies. France must take its own decisions and will take its own decisions."

Diplomats from countries that would have to share the bill with Germany for some form of common eurozone budget said their governments will want to see a track record of at least a year of domestic reforms in France before they are willing to enter a serious debate on future pooling of resources. That will inevitably mean constructing a government after June's parliamentary elections that can govern effectively, one diplomat said.

Even in countries that back deeper eurozone integration and would stand to gain from broader German largess, there is a clear understanding that France's new president will have little power of persuasion in Berlin until he has proven his political mettle at home.

"I think it would be very useful that in the leading European capitals, people perceive that France...is willing to make the reforms, to do what they have to do," one senior diplomat said.

In recent years, France has repeatedly demanded -- and obtained -- extensions of the deadline for bringing its budget deficit below the cap of 3% of gross domestic product. Similarly, EU demands for overhauls of France's labor market have been largely brushed off by Paris while other governments, like Italy and Spain, were obliged to comply.

European Commission President Jean-Claude Juncker voiced those frustrations on Monday, saying that while he was delighted by Mr. Macron's victory, the French government couldn't continue with its high level of spending as a percentage of the economy.

"We have a special problem with France. I am extremely Francophile, but the French spend too much money. And they spend it in the wrong place," Mr. Juncker said.

Mr. Macron's closest ally in his efforts to convince Germany to change course on austerity may be German Foreign Minister Sigmar Gabriel -- a member of the Social Democratic Party, the center-left junior coalition partner to Ms. Merkel's Christian Democrats. He has gushed about his personal friendship with Mr. Macron and said Monday that Germany should offer more flexibility on the eurozone's fiscal rules to prevent nationalist leader Marine Le Pen from winning the presidency when France votes again in 2022.

"I once asked the German Chancellor, 'What's really more expensive -- 0.5% higher deficits for France or Ms. Le Pen as president?'" Mr. Gabriel said Monday, referring to Ms. Merkel. "That is why I think we Germans must change our position."

But in an election year, such comments could turn off German voters already unnerved by the large bailouts required to keep such countries as Greece, Ireland and Portugal afloat during the eurozone debt crisis. Hans Michelbach, a senior conservative lawmaker allied with Ms. Merkel, dismissed Mr. Gabriel's comments as evidence of his party's "economic incompetence."

Rather than make domestically unpopular concessions to Mr. Macron's fiscal agenda in the coming months, Ms. Merkel might look for other areas to boost European integration, a German official said. That could include defense or foreign policy, where Berlin and Paris have already been working on deepening ties.

"We take Emmanuel Macron by his word and believe that he will carry out the reforms that he laid out in his campaign," said German lawmaker Jürgen Hardt, a specialist on foreign affairs in Ms. Merkel's Christian Democratic Party. "Should his new government decide to depart from these reforms, then there is the danger that in five years the situation will be even worse and the breeding ground for Le Pen even better."

Write to Anton Troianovski at anton.troianovski@wsj.com, Andrea Thomas at andrea.thomas@wsj.com and Laurence Norman at laurence.norman@wsj.com

(END) Dow Jones Newswires

May 08, 2017 15:16 ET (19:16 GMT)