WSJ December 22, 2018

Macron Is German Taxpayers’ Last Hope

If French reforms fail, it’s hard to see how else the eurozone survives.

By Holman W. Jenkins, Jr. | 780 words

In reckoning with the 2016 British referendum that gave the world Brexit and then the U.S. election that gave the world Donald Trump, one truth hasn’t quite come into focus. So regularly were voters told that the winner couldn’t win, many likely thought they were casting a “safe” protest vote.

Brexit now appears to have been a gross miscalculation all the way around. Both the Tory and Labour parties were wrong-footed. There was no credible leadership faction ready with a plan for how the United Kingdom could make its exit from the European Union, restructure its economy, and survive and prosper.

But equally blundering have been the miscalculations in Brussels, Paris and Berlin. EU leaders leapt, and continue to leap, to the conclusion that torturing Britain on the way out is the key to making a troubled European Union sustainable, supposedly because it deters other from exiting.

This seems little short of insane. The troubles of the EU arise overwhelmingly from its unaffordable welfare states and its single currency, the euro, which Britain never joined. It benefits Britain very little to extricate itself from the common market, unified Europe’s one useful creation. It benefits the European Union even less to refuse Britain a smooth and neighborly exit. A thriving U.K. economy is one thing Europe could use right now while it struggles to remove its slow-growth handcuffs.

Two-and-a-half years ago, the world’s eyes were on the Brexit vote, but even then we stressed how hard it was to see France and Italy ever righting themselves within the eurozone, which is the real threat to Europe.

It’s even harder now. France is aflame with Emmanuel Macron’s botched reforms, meant to get the French economy growing again by relieving the burden of over taxation and stifling regulation.

It would take a psychiatrist to explain how, in the middle of this arduous project, he decided to throw a new fuel tax, in the name of climate correctness, on the backs of vulnerable French rural and working-class voters, giving rise to what were originally peaceful protests of the center and now are violent protests of the hard-bitten left.

If his motive was to display France’s environmental virtue for the benefit of fellow Europeans, he could have contented himself with saying: “We will put more taxes on our motorists as soon as the rest of Europe duplicates France’s success in producing 75% of its electric power with carbon-free nuclear energy.”

France accounts for 20.5% of the euro-area economy. Its partnership with Germany has been the foundation of the European project since 1945. If Mr. Macron cracks as he appears to be cracking, expect French deficits, which have already been allowed to exceed EU rules, to soar. Expect the markets to abandon hope that Paris can restore dynamism sufficiently to make good on its large debts and social-spending commitments.

What comes next? Presumably the European Central Bank was buying time for something with its “whatever it takes” promise to prop up the market for European IOUs. That something was Macron-style reforms. If today’s events show France is unreformable, how can the logical alternative not be exiting the eurozone to carry out a currency devaluation? Good question.

Italy accounts for 15.4% of eurozone gross domestic product. It has the fourth-largest total debt load of any country in the world, and already is in a showdown with the EU over a plan to run a deficit smaller than France’s. The cats-and-dogs coalition in Rome has been thumbing its nose aggressively at Brussels, but at least it has some pro-growth tax ideas on the agenda. Bottom line: If the eurozone’s last hope for salvation rests on the shoulders of half-hearted Italian reformers, look out. That is, unless you believe that German households—which have been noticeably surly anti-EU voters lately, too—are willing to become more explicit guarantors of $5.1 trillion in French and Italian debt.

To be sure, this would be doable, and cost-free at least until the guarantee was called upon. German households possess $4 trillion in net wealth, of which they pass along $400 billion a year in inheritances. But while the country has a respectable average household wealth by European standards, its median wealth is lower than Slovakia’s, according to an ECB survey published in 2013. As in France, a surprising number of German citizens are barely getting by. So is a German version of France’s “yellow vests” eruption out of the question? Probably not.

How much the European project depends on the suspect generosity of German taxpayers would then quickly become clear, and not in a good way. If I’m missing something, please tell me. It’s hard to see any happy endings for the eurozone.■