Merkel Signals Openness to Eurozone Reforms

By Bertrand Benoit and Andrea ThomasFeaturesDow 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 closer toward reconciling sharply different views on the matter.

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.

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"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 money transfers and joint liabilities among member states, Ms. Merkel said "we could think about a common finance minister...if we aren't pooling liabilities in the wrong place."

Ms. Merkel's surprise overture, however qualified, and her willingness to discuss issues that have long been taboo in Germany suggest the stalled process of reforming the eurozone could kick back into life sooner than most experts had expected.

The timing of her 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 future of the eurozone before the vote, insisting French President Emmanuel Macron had to prove his mettle first by enacting a string of domestic economic measures over the summer.

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 very 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 so far has focused on tougher central controls on public spending and has long rejected the idea of jointly issued bonds, which Berlin thinks would encourage overspending by economically fragile members.

Under its newly elected president, 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.

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. Fixing France's own economic flaws, they said, would be a prerequisite to any serious talks on overhauling the eurozone.

"We still need to see the evidence," one official said. A joint working group of French and German finance ministry officials has met but has yet to touch on eurozone issues, one person familiar with the agenda said.

French officials in turn say they are reluctant to directly confront Ms. Merkel with specific demands Mr. Macron made in his election manifesto. Instead, officials in Paris say they are working behind the scenes with German counterparts on how to integrate their economies, rather than sealing an agreement on new formal structures or a finance minister post. The topic is expected to be a central theme of a joint Franco-German cabinet meeting mid-July.

France's lackluster economic performance, its failure to unshackle a regimented economy, and repeated breaches of European fiscal rules have dimmed the country's voice in Europe and accelerated Germany's rise as the region's dominant power.

But after last weekend's parliamentary election in France gave Mr. Macron's movement a comfortable 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 empower his government 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 to resolve will be the scope of a possible agreement, which could range from minimalist 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 rights and access to a rainy-day fund to prop up members in difficulties. Or it could consist in strengthening the remit of the European Commission in fiscal matters.

The more ambitious version would require an amendment to European Union treaties and therefore unanimous agreement among all 28 EU members. In an interview with French daily Le Figaro in May, German Finance Minister Wolfgang Schäuble said any eurozone reform requiring treaty changes "is 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 and Andrea Thomas at

(END) Dow Jones Newswires

June 20, 2017 13:28 ET (17:28 GMT)