Two days ago, when we laid out the components of Merkel and Macron's blueprint to reform the EU, we said that while "Macron suggested the proposal will be presented to other countries, with specifics to be worked out later this year and the plans to take effect from 2021, it was unclear how he plans to get "other countries" to vote for a proposal which has already led to the alienation of Central and Eastern Europe, Brexit and an openly populist government in Italy."
We did not have to wait long for confirmation, because just two days later, Europe's two self-proclaimed leaders were facing an unexpected backlash from most other European governments against the German and French plans for a common eurozone budget, dealing a blow to the two countries’ ambitions for a big overhaul of the single currency area.
As the FT reports, the rest of Europe's "core", including the Netherlands, Austria and Finland are among 12 governments questioning the need for any joint eurozone “fiscal capacity”, challenging a central tenet of French President Emmanuel Macron’s vision for the eurozone that he has successfully pressed Berlin to endorse.
As we reported on Wednesday, increasingly unpopular French president Macron and the politically embattled Merkel tried to restart their close collaboration this week ahead of a wider summit of EU leaders. They agreed that a new common pot of eurozone money could be funded by a mixture of national contributions and new EU levies, such as a financial transactions tax.
Ironically, while their agreement supposedly forms part of a broader deal between Paris and Berlin on how to strengthen the currency bloc, the rest of Europe generally disagreed, which incidentally is also the reason why any attempt at "Federalizing" Europe is doomed to failure: Europeans tend to frown upon self-declared "master states" who tends to decide for everyone else, even if these states end up paying for much of the outlays (largely thanks to the presence of the EUR and the absence of the DEM).
As a result, EU diplomats said Merkel’s concession to Macron - as a reminder, having found herself isolated at home, Merkel has been forced to see support abroad - had emboldened other countries to resist the blueprint, out of concern that it would leave their taxpayers too exposed to problems in crisis-hit member states. And, as the FT writes, the splits were observable at a meeting of EU finance ministers in Luxembourg on Thursday, with increasing signs that governments have formed competing camps with distinct visions on the direction of further integration.
According to a letter seen by the Financial Times, Dutch finance minister Wopke Hoekstra has written to Mário Centeno, the president of the eurogroup, to underline that there is “wide divergence” on the need for any budget, with a number of countries concerned about “moral hazard risks” and questions of “fiscal neutrality” posed by the plan.
The letter insisted that the lack of the agreement on the budget be clearly communicated to leaders at next week’s summit.
"There was clearly no consensus on starting to explore options" at Thursday’s meeting of finance ministers, the Dutch finance minister said in the letter, adding there was also no agreement to start exploring the use of a financial transactions tax to finance it.
And the punchline: the letter was written by the Dutch finance minister on behalf of Belgium, Luxembourg, Austria, Sweden, Denmark, Finland, Latvia, Lithuania, Estonia, Ireland and Malta.
The simple math: 2 vs 12, and it is safe to say that the rest of the eurozone is not aligned with France and Germany either.
It gets better: according to the FT, the 12 countries expands a coalition called the “Hanseatic League” (a reference to the commercial and defensive confederation of merchant guilds and market towns in Northwestern and Central Europe, which in the late 1100s, grew from a few North German towns to dominate Baltic maritime trade for three centuries along the coast of Northern Europe), an initial group of eight smaller fiscally conservative countries, which have insisted on more national responsibility to solve economic problems in the eurozone.
Meeting with vocal resistance, Berlin and Paris have insisted that the Franco-German deal on reforming the monetary union is not a fait accompli for the rest of the eurozone; it is however mandatory that at some point Europe will have to be reformed, and Germany and France will have to likely lead that effort (assuming of course that Merkel is still around). And judging by the Thursday backlash, Europe's core has just carried out a coup.
Trying to soften the harsh reception, French finance minister Bruno Le Maire said that “it is not a take it or leave it road map. It is open for discussion for negotiations among members of the eurozone.”
And judging by the reaction, Europe is done "negotiating" when the outcome is the one pre-decided by just two nations.
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But wait, it gets worse, because while Merkel and Macron may have been hoping to lay the groundwork for what Europe will look like in several years, Merkel may not make it if she is unable to find a common ground in the coming "migration" summit, and fails to provide a satisfactory answer to the CSU's 2 week ultimatum.
As Reuters reports, Merkel played down expectations of any major breakthrough at hastily-arranged talks among EU leaders on Sunday on the migration dispute dividing Europe. Plans for the emergency meeting, before a full EU summit at the end of next week, were thrown into chaos on Thursday when Italy’s new prime minister said a draft accord on migration had been withdrawn because of a clash with Merkel.
The German chancellor is under pressure to get EU leaders at the main June 28-29 summit to agree to share out migrants more evenly to placate her conservative allies, Bavaria’s Christian Social Union (CSU). But Italy and others are very reluctant.
Initially expected to involve eight EU leaders, the Sunday talks will now bring together at least 17, according to the latest count by officials in Brussels.
“The meeting on Sunday is a consultation and working meeting at which there will be no concluding statement,” Merkel told reporters in Beirut with Lebanon’s Prime Minister Saad Hariri on Friday. “It is an initial exchange with interested member states.” She said conditions in Syria were not yet right for refugees to return. Germany has taken in hundreds of thousands of Syrians and others since 2014, and migration policy is threatening her ruling coalition.
If no “satisfactory” deal is achieved at next week’s summit, German Interior Minister and CSU chief Horst Seehofer has threatened to defy Merkel and turn people away at the German border who have applied for asylum in other EU states.
However, with Italy now taking a hardline approach and refusing to accept any more migrants, Europe finds itself in migrant chaos with no way out, one spawned by Merkel's own disastrous 2015 "open door" policy, and absent a "Merkel Miracle" over the next week, the chancellor may be out of a job as soon as early July, with Germany facing new elections potentially as soon as September, an outcome which the SPD is already actively preparing for.