Emmanuel Macron,(IMF head) Christine Lagarde and Angela Merkel talk during the G7 Summit, May, 2017. Nur Photo/ Press Association. All rights reserved.From the founding of the European Coal and Steel Community to the creation of the euro, the European Union has been driven by a Franco-German locomotive. This may have become a cliché but it is no less true for that. As the French side has run out of ideas and stalled on reforming its economy in recent decades, the European train has slowed down.

Germans have come to see the French as less trustworthy than hitherto but have not been entirely happy with the mantle of EU leadership thrust upon them as a result of French woes and Brexit. Donald Trump’s erratic presidency follows its own course but the election of a younger leader in France, who not only seems intent on breaking the fossilised mould of French politics but has an ambitious policy for modernising the economy, has revived hope that the EU can move forward. Grand talk of reinventing the Eurozone is widely off the mark, but new ideas are needed.

That will be no easy task but it is best not to put the cart before the horse. Macron faces a number of tests on the home front. His young party, La République en Marche, must secure a majority or – at the very least, a large plurality of seats in the National Assembly in this month’s parliamentary elections. The latest polls suggest his party will attract about 30% of the vote in the first round of the elections on 11 June – a ten point gain in a month, putting the party within reach of winning an absolute majority in the run-off round on 18 June.

A clear majority is not a given for Macron as electors face multiple confusing choices and some Socialist and Republican candidates are claiming to belong to the presidential majority though they have not been endorsed by REM. The controversy over Richard Ferrand, a former Socialist minister with a seat in the cabinet and an early supporter of Macron is casting an unwelcome shadow. He helped his partner buy a property when he was head of a not-for-profit insurance group in Brittany and employed his son as a parliamentary aid. 

Mr Macron promised to restore political “morals” and is preparing legislation to crack down on politicians employing relatives – the allegations which destroyed the presidential hopes of François Fillon earlier this year. If the public prosecutor decides to follow up the inquiry he has opened on the affair, the president will be duty bound to ask Mr Ferrand, a close political ally, to leave the government. 

The results will tell us whether or not we are witnessing a historical shake-up of the French political scene. The president’s momentum since his election, his charm offensive in Berlin the night after he was inaugurated, his sure-footed presence at NATO and G7 meetings, the manner in which he handled Donald Trump and Vladimir Putin who he received in Versailles, all reassured the French electorate that their young leader had the skills to represent France on the international stage.

The 2% standard

Pragmatism is what is needed both in Berlin and Paris. The new minister of defence and former centrist European MP, Sylvie Goulard says that “our first priority is to be pragmatic.” That is important because deepening the conversation and co-operation on security matters might be the only way to get the Germans to move on matters concerning the banking union. But it is worth bearing in mind that historically France has seen itself as having a role in promoting monetary reform.

The present 2% inflation standard is not working; it has produced huge instability and is the source of a potential trade war. Could Macron, who unlike his four predecessors, actually understands the technical inner workings of monetary and trade policy, take the lead in a global transition away from this 2% inflation standard?

German policy poses a major difficulty for the euro. For years, the country’s rules and regulations have held down wage growth, which means productivity grows faster than workers’ pay. That has enhanced the competitive advantage of German manufacturers against their international counterparts. Combined with a tight fiscal policy, this has depressed German consumer demand, a problem which looms large in countries like Spain, Italy and Greece. German economic policies have held back the recovery of their weaker Mediterranean partners.

Germany has long benefited from the euro whose value is based on the international trade and capital flows of the 18 countries that use the currency. German’s economy is stronger and more productive than its EU counterparts thus effectively undervaluing the currency for its exporters. A weak euro helps Germany’s competitiveness globally but, to make matters worse, the country has exported its macroeconomic policies to the rest of the Eurozone by forcing countries such as Greece to adopt a tight fiscal policy in exchange for bailouts. Such policies benefit German manufacturers but spell a slow recovery in Europe and beyond.

Sound money and strength at home

Trump has harsh words for Merkel’s economic policies but his diagnosis is imprecise, delivered in arrogant bluster and unlikely to influence matters in the short term.

He is on stronger ground when he blames what critics might term interest rate and broader monetary manipulation (by the European Central Bank implicitly) as responsible for a very undervalued euro which has produced a huge German surplus. This could be the cue for Macron to revive France’s traditional role as sponsor on international monetary reform, that of the economic adviser of General de Gaulle after 1958, Jacques Rueff. Macron could seek the support of the hard money tradition of Germany to demand that leading central banks in Europe, the US and Japan abandon the 2 per cent inflation standard, pointing out that the zero or negative rates resulting from this policy have spawned vast asset market bubbles around the globe.

The ECB and more broadly the central bankers club have defied sound money for too long at the global economy’s future peril. Many observers however remain unconvinced about the destabilizing influence of the 2 per cent inflation target. They point out that the underlying problem is that a single monetary policy is being applied to a group of countries that do not constitute an optimal currency area and where there is no mechanism to force Germany to run a higher rate of inflation to compensate for imposing deflation on southern Europe and no mechanism to bring about economic convergence more generally. So shifting to a long term price stability target could still result in imbalances across the monetary union. Mr Macron might also succeed in building bridges in Washington in pursuit of such ideas, and he could save Europe from a trade war with the US.

That of course assumes a US administration which is focused and coherent in its aims. The uncertainty which surrounds US policy-making means that even when the president makes a valid point, he gains no traction. Macron will surely make some of these points in private and with a view to having a conversation rather than a confrontation.

Whether he succeeds will be determined by how strong he is at home, how successful in nudging the trades unions along the path of reform and – last but not least – the outcome of the German general elections next September.

Irrespective of its political complexion, German leaders will have to acknowledge more than hitherto that the country has been having a happy ride on Europe since reunification, which Europe funded through inadequate contra-cyclical policies in the 1990s. its massive trade surpluses are a costly transfer from other EU countries to Germany; it has breached liberal democratic principles not least by disregarding the political choices of Greek citizens.

As Jean Bernard Tanqueray wrote in a recent letter to the Financial Times “Germans want to have ‘le beurre, l’argent du beurre et le sourire de la crémière’ by politically and economically subverting all other European nations rather than facing the fact that they undemocratically lied to their own electorate about the true nature of the monetary union.”

Unless they change their views, Europe may fall apart. They will find no better partner to help them out of their dilemma than Emmanuel Macron, but he will have to deliver on reforms if he is to stand any chance of doing so.

A strong showing of the party he founded just over a year ago would be invaluable in keeping up the momentum. As any leader knows, painful reforms only stand a chance of being enacted in the immediate aftermath of victory. A double victory, if that is what the outcome of the parliamentary elections turns out to be will offer head winds which Mr Macron will no doubt take advantage of.