Has a prodigal relative ever suggested uniting bank accounts with you and tried to convince you it’s a good idea? After all, you have shared history, common interests and it could strengthen your relationship and unite your two banking systems, strengthening both your positions in the event of economic instability. It all sounds nice and unifying, but when it comes down to it, all it really means is your spendthrift cousin has run out of money and wants some of yours.
The Wall Street Journal reported that German Chancellor Angela Merkel has thrown cold water on French President Emmanuel Macron’s insistence on pooling fiscal resources and liabilities in the European Union. Ultimately, this will be better for the euro (FXE, Financial) than otherwise.
It’s not hard to see why she has rejected the French president's proposal. According to the Stability and Growth Pact of 1998, on which the eurozone is based, no country in the eurozone is allowed to exceed an annual deficit of 3% of gross domestic product or a debt to GDP ratio of 60%. France has breached both of these limits every year since 2007, and has not complied with the official deadline of 2013 to come back in line with the limits.
As ever, there are second, third and so on chances to regain compliance because the alternative is the dissolution of the eurozone, which brings the meaning of the limits themselves into question. While France is by no means the only country out of line with fiscal targets – Germany was, too, from 2008 to 2010 – it’s another thing entirely to hit up another country for more money while still bailing out Greece and while you yourself remain in breach of fiscal pacts.
A quick look at these two charts shows clearly why Merkel is not very excited about pooling fiscal resources and liabilities among eurozone members.
While Germany is still in breach of the 60% debt to GDP limit, since that ratio has been declining since 2010, it is still considered compliant with the SGP since the ratio is approaching 60%. The French debt to GDP ratio, on the other hand, has risen every year since the financial crisis, but that’s not all.
As you can see from these two additional charts, France’s annual budget deficits have exceeded the 3% of GDP limits since even before the financial crisis every single year.
Germany’s budget deficits, on the other hand, have disappeared entirely since 2013, and the Germans have logged a budget surplus for four years straight now.
Pooling fiscal resources and liabilities would not be advantageous for Germany or its taxpayers, which is why Merkel has rejected it. It would mean German taxpayers would be on the hook for French government spending habits, not to mention every other country out of compliance with fiscal limits set in the SGP, and there are 14 of them, including Greece.
Greece's debt to GDP ratio, by the way, is now 180% and still rising despite finally logging a surplus of 0.7% of GDP in 2016.
If Eurozone finances are pooled, it would not be just Germany with France. Germany and every other relatively fiscally responsible government in the eurozone would have to pool resources as well with heavily indebted sovereigns and assume the debts of those who have already spent way too much money.
It’s no wonder that Germany rejected the proposal out of hand. The question now is, will France be forced to take responsibility for its own finances or will it keep spending until the euro itself disintegrates in a cloud of extreme debt? And if it does, what does Germany do then?
The way I see it, there are two options if France and others refuse to take conrol of their finances. Either Germany keeps the euro for itself and other fiscally responsible nations and lets the other eurozone countries default and fall, or it leaves the eurozone on its own and goes back the Deutsche mark. Both are just opposite sides of the same coin and would lead to the same result -- skyrocketing bond yields in indebted eurozone countries, adding fuel to the fire of rising interest rates already raging across the globe.
