MNI ANALYSIS: Merkel Election Win No Quick Path to EZ Reform

--Efforts Toward Franco-German 'Grand Bargain' Stumble on Different Visions

By Jack Duffy

     PARIS (MNI) - Hopes that Germany's federal election on Sunday will pave the

way for a "grand bargain" between Paris and Berlin that will transform the

Eurozone are running high -- too high according to officials and analysts in

both countries, MNI understands.

     Angela Merkel is expected to sweep to a fourth term as chancellor on Sunday

and one of the first tests of her new government will be to decide how much

ground to concede to French President Emmanuel Macron in his ambitious push for

a more integrated Eurozone.

     French government sources confirmed to MNI that Macron will unveil a

detailed "road map" of his proposals next week, possibly on Tuesday.

     Merkel has paid lip service Macron's ideas during the campaign, saying "Why

not?" when asked about proposals for a Eurozone budget and finance minister. The

detailed post-election debate is expected to be much more difficult, officials

say.

     "There is a wait-and-see attitude" with the German side, Laurence Boone, a

former top economic advisor to President Francois Hollande, told MNI in an

exclusive interview. "They want to see progress on domestic reforms first."

     Paris and Berlin also have very different visions of a Eurozone budget and

finance minister would look like, officials say. Where Macron wants a finance

minister with broad powers to drive growth and a huge budget worth "several

percentage points" of GDP, Germany prefers an enforcer with modest resources who

would do a better job of making member states comply with fiscal rules than the

European Commission has done.  

     "Intellectually the two sides remain miles apart," said Christian Odendahl,

the Berlin-based chief economist au Centre for European Reform, a think tank.

     Progress toward a compromise will be closely watched both on Wall Street,

where a "transformative" reform package is seen attracting billions in capital

flows into the euro, and by the European Central Bank, which views a more

integrated Eurozone as being better protected from external shocks.

     "It's important and necessary," one senior ECB official told MNI. "And

conditions have never been more favourable."

     With the Eurozone economy growing at its fastest pace since the debt crisis

and France and Germany's election cycles aligned this year for the first time in

more than a decade, now is a key moment to make progress, the official said. 

     Macron has started tackling the reforms necessary to convince Germany that

France is now a credible partner, with a long-awaited liberalization of French

labour market to be implemented this week. He has also promised to overhaul

pensions and unemployment benefits, the two other key areas where Germany wants

to see reform progress.  

     "We need a bit of a 'wow' effect," to convince Germany that France is

serious, said Boone, who is now chief economist at the French insurer AXA. "If

Macron can tick those other two boxes I think we could get that wow effect."  

     But post-election politics in Germany could also make a Franco-German

compromise more difficult.

     A Merkel win on Sunday will be followed by a month or more of talks to

build a new governing coalition. If Merkel's CDU/CSU bloc opts to join forces

with the pro-business Free Democratic Party (FDP), her latitude on Europe could

be severely limited. The FDP leader, Christian Lindner, 38, has been called the

"anti-Macron" as he has aggressively dismissed the French president's Eurozone

proposals and argued that Greece should leave the Eurozone.  

     "You will not have on September 25 a new government eager, willing and able

to discuss Eurozone questions," said Henrik Uterwedde, deputy director of the

German-French Institute in Ludwigsburg, in south-western Germany. "There will be

a difficult period of coalition building."  

     Uterwedde said Germany was "sympathetic" towards Macron because of his

domestic reform efforts but that did not mean Merkel could or would be rushed.  

     "These measures will have to be explained to the public and Merkel is

unlikely to go quickly," he said.

     Timing is tight. French officials worry that if progress is not made in the

first half of 2018, the urgency of Eurozone reform will fade as EU capitals

focus on Brexit, where negotiators have only until March 2019 to reach an

agreement.

--MNI Paris Bureau; tel: +33 1-42-71-55-41; email: jack.duffy@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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