Stability and Convergence: A new era for the Eurozone?

The leaders of Germany and France announced yesterday that they have agreed in principle to implement a unified Eurozone budget by 2021.  Following their meeting outside of Berlin, German Chancellor Angela Merkel and French President Emmanuel Macron presented a unified front on a deal that would not only include a single Eurozone budget, but also co-operation on migration policy, defence agreements, and taxation issues.

While 17 other Eurozone countries have yet to agree, Germany and France are the two largest economies that use the unified Euro currency, giving them significant leverage over likely holdouts like Italy.  A shift to a unified Eurozone budget could have significant consequences not just within the Eurozone, but also globally.

Why the Change?

When it was first conceived of in the early '90s, the purpose of the Euro was to stabilize prices throughout Europe, and make trade within the region easier; there was no foreign policy attached to the currency.  As a result, there has been a disconnect between the financial and political well-being of the Eurozone countries, and the Euro has been susceptible to asymmetrical shocks like the Greek government debt crisis of 2010.

By pushing for the adoption of a unified Eurozone budget, the leaders of Germany and France are hoping to shore up the Euro, protect the Eurozone economies against future financial crises, and strengthen the region's international influence.  Additionally, a unified budget would be necessary if the Euro ever wants to seriously challenge the US dollar as global reserve currency.  Macron described the move as having the dual objectives of "stability and convergence", while Merkel acknowledged that Europe will be working on the details of the agreement "for a while".

More than a Budget

The announcement also carries significant symbolic value, both within Europe and abroad.  Domestically, Merkel has been dealing with dissent over how to deal with migrant arrivals, and members of her coalition government have given her two weeks to find a solution.  Macron's support of Merkel is intended to have a positive effect on her ability to extract compromises from the German legislature.  The two leaders recently returned from a contentious G-7 meeting in Canada, at which the US President seemed to be attempting to dismantle the longstanding economic co-operation and mutually beneficial alliances between the world's largest democratic economies.  By advocating increased ties between the two countries, they are signalling that Europe, unlike the United States, is increasingly looking to strengthen its international competitiveness and suitability as a market for foreign investment.  Greater European ties at a time that the United States is retreating into protectionism and isolationism sends both a political and economic message to the world about the region's forward-looking perspective.