French president Emmanuel Macron’s plans to make common cause with Germany to reform the eurozone have suffered an early setback as Berlin pushes proposals for sovereign debt writedowns that Paris fears could shatter investor confidence in the single currency.
Mr Macron wants ambitious overhauls of eurozone governance ranging from the creation of a large common budget to the appointment of a European finance minister. Angela Merkel, the German chancellor, signalled last month that the proposals, part of a broader agenda for EU renewal, were a “good basis” for negotiations.
But in a sign of how difficult it will be to find common ground on the euro, the German finance ministry has set out a blueprint that rides roughshod over some of Paris’s priorities.
The paper entitled “Paving the way towards a Stability Union” was circulated ahead of a meeting of the eurogroup of finance ministers in Luxembourg on Monday.
After Wolfgang Schäuble, Germany’s finance minister, outlined the German position on euro area reform at Monday’s meeting, diplomats said the paper had exposed key faultlines in the reform debate, notably over the treatment of sovereign debt in crises.
Bruno Le Maire, France’s finance minister, told reporters that Paris opposes the idea, set out in the German paper, that help from the euro area’s bailout fund should always be conditional on a government’s restructuring its debt and putting investors in line to suffer losses.
The German finance ministry argues for a “predictable debt restructuring mechanism” that would mean bailouts from the European Stability Mechanism would come with the “obligation to carry out comprehensive debt restructuring if this is necessary to ensure debt sustainability”.
Mr Le Maire said Paris is wary such plans could do more harm than good. “We do not support the idea of an automatic mechanism for sovereign debt restructuring,” he said. “We believe it could create more instability than stability.”
In addition to the tough line on debt restructuring, the German paper also rejects Mr Macron’s plan for a large euro area budget to help out countries in times of trouble, saying it is “economically not necessary for a stable monetary union”.
Instead, the paper places emphasis on measures to encourage countries and banks to be more responsible in managing their finances.
This resurrects ideas pushed by Germany, such as better linking EU regional aid to respect for euro area budget rules, and tougher regulatory treatment of banks’ holdings of sovereign debt.
After the meeting Jeroen Dijsselbloem, the Eurogroup’s president, said reform discussions were at an early stage and that more detailed negotiations would be held next month.
An early focus will be on how the ESM’s role could be “strengthened” and “deepened” he said. There was “strong support” for using it as a backstop for the euro area’s system for handling failing banks.
“There are some avenues that are clearly open,” Mr Dijsselbloem said.
A French finance ministry source said that Franco-German disagreements were to be expected and that talks on euro area reform could still advance.
“It is normal to have differences of view at this stage with the Germans,” the source said. “We should be open about those differences. Each member state needs to put forward its vision and views and then we will all work on finding a compromise.”