The Franco-German axis, the traditional driving force behind all the major decisions that the EU has taken since its birth, is going through its worst moments at the very moment when the Union is faced with to an “existential challenge” against their great rivals –United States and China–, in the words of former ECB President Mario Draghi.
Draghi himself has a clear roadmap for meeting this challenge. However, the European institutions already informally recognize that even an expert in rescuing the community project like the former president of the ECB will not succeed in achieving its objectives. as ambitious as mobilizing 800 billion euros of investments, if Paris and Berlin remain mired in their current weakness.
Such a high figure results from a calculation prepared by the European Commission and the ECB itself, as Draghi clarified during an event organized this week by the Bruegel Institute. The former Italian Prime Minister also insisted that it is not possible to obtain such a position from the European budget, because that would involve multiplying it by five, nor from national budgets, because would compromise fiscal sustainability.
This is why the option of a new massive issue of common debt, ensuring the continuity of the formula applied in the recovery plan after the pandemic, appears to be the only viable solution, if it were not for two key elements of this plan, Paris and Berlin. now have their own problems to solve.
The traditional German allergy to anything that suggests common European debt problems is now harder than ever to overcome, due to the internal divisions undermining Germany’s governing coalition. The German Minister of Finance himself, Christian Lindner, took the liberty of taking the initiative – without waiting for Chancellor Scholz – after reading the Draghi report. “Germany does not agree with this“, said the German minister. “Our problem is not the lack of subsidies, but bureaucracy and economic planning. More public debt costs interest, but it does not necessarily create more growth,” he said.
And growth is precisely another of the great problems of the European locomotive, until now uncontested. Germany, already known as the “sick man of Europe,” closed last year with a GDP contraction of 0.3%. Even if Brussels estimates show a slight 0.1% rebound for this year, The main German economic institutes point out that its GDP could fall again in 2024, by 0.1%. Either way, what they leave behind is the prospect of a rebound.
France, for its part, is not able to fill the void left by Germany on the Union’s command deck and bring to life the ambitious investment initiative of the Draghi plan, even if the President Macron is a strong supporter of the Marshall Plan designed by the Italian politician.
The French situation suggests, for the moment, the instability of a minority government and the escalation of a debt which raises concerns about budgetary control. Between April and June, its debt increased to 112% of GDP, according to the French Statistics Office. That same week, the French 10-year bond was briefly flagged as a riskier investment than the Spanish bond. He The Spanish bond was listed cheaper than the French bond for the first time since 2008. This means that Paris must pay an increasing amount to refinance its debt.
Open files
Furthermore, France and Italy are among the countries that the European Commission included in the excessive deficit procedure last June. The French deficit aims to reach 6% of GDP by the end of the year and Barnier’s executive has drawn up a plan in which he postpones reaching the target of 3% of the deficit demanded by the EU by 2029, instead of 2027, as initially planned. His plan includes spending cuts and tax increases on the wealthy and big businesses.
From a purely technical point of view, French and German bonds are the essential references which would mark the performance on the futures market eurobonds, explains elEconomista.es the European Commission itself. Even if in theory Eurobonds are shared between all EU countries, a large part of the guarantee should be offered by Germany, even more than by France, since the pack Germany is one of the most reliable fixed income securities in the world, along with US debt. With this formula, Berlin unwittingly becomes the guarantor of much smaller economies by issuing joint debt.
Greater opposition
There is practically no alternative to support the Draghi plan if Germany and France do not support it. It is no secret that there are other countries very reluctant to mobilize resources in such large quantities as demanded by the former central banker.
Among the so-called frugal economies, the main voice is that of the Netherlands, which has categorically rejected for months that this path could become a reality. However, southern Europe, including Spain favorably evaluates this option.
The former president of the ECB stressed this week that these 800 billion euros “is a conservative figure”, since they do not include items such as adaptation or climate protection, nor for training for future professions. In all cases, funding must come from similar positions in the public and private sector, in a balance of 50% and 50%Draghi stressed.
The investment gap between the EU and the United States is one of the elements he draws attention to in Italian in his report. The enormous amount of subsidies from the US Inflation Reduction Act has gone unrequited by the EU, which needs incentives and subsidies to strengthen its competitiveness against Washington and Beijing. We must also encourage investments to remain on European soil. Also avoid the flight of companies which, in looking for capital and mechanisms to develop your business, make the decision to move to the other side of the pond. A situation to which neither the fragmentation of the single market nor the different national regulations contribute.
