What happens to Europe when neither France nor Germany has an influential leader? Brussels is about to find out. European Commission President Ursula von der Leyen’s steady hand looks set for a second term atop the European Union executive. In theory, voters have been clear about what they want: a centrist government with new faces, right-wing trappings, and a strong dose of social democratic stability. In practice, neither Paris nor Berlin is getting the message.
German Chancellor Olaf Scholz has been the missing man during the EU election season, even though his job wasn’t one of the ones on the line. His Social Democrats (SPD) finished just third at the in the recent European Parliament elections, but not because of a clear mandate for anti-establishment rabblerousers. Instead, Germany’s top vote getter was the Christian Democratic Union, party of Scholz’ predecessor Angela Merkel—and von der Leyen herself.
Meanwhile France’s centrist, pro-European President Emmanual Macron is fighting for his political life, after his allies were soundly trounced by Marine Le Pen’s far-right Rassemblement National (RN). Macron responded by calling a shocking snap parliamentary election. He gambled that voters will give him back the reins, but the move may just worsen the gridlock if the new parliament refuses to govern with him.
France and Germany are at odds over how tough a line to take toward Chinese electric vehicle subsidies, how to manage Europe’s energy grid, and whether the EU should continue its successful joint borrowing program. While Berlin’s internal divisions have kept its EU voice muted, Paris has alienated would-be allies by marrying its EU agenda with its ambitions for its national champion big companies. As a result, smaller countries are wary of plans for capital markets union and infrastructure investment, two areas where a common European approach could spark big improvements for the broader economy.
France and Germany Misplayed their Hands
This all provides von der Leyen with both challenges and opportunities for her next term, if she is re-nominated and re-appointed as expected. Her party, the European People’s Party (EPP), did better than expected, and her experience responding to the pandemic and Russia’s full-scale invasion of Ukraine should help in coping with whatever comes next. In turn, a strong and effective European Commission president would have advantages for both of France and Germany, who would benefit from a more activist and unified EU. Yet both Scholz and Macron have misplayed their hands so far.
Either one could have used their political differences with von der Leyen to their own advantage. Instead, neither was willing to offer her a strong endorsement and as a result, they have less influence over the whole big jobs debate. Macron, for example, was essential in bringing von der Leyen to power in 2019, when she emerged as a dark horse candidate after the “Spitzenkandidaten” process failed. Yet instead of backing her for a second term, he repeatedly dangled the prospect of other candidates. And instead of embracing the EU’s system of power-sharing among party groups, he sought to supersede it by repeatedly floating non-partisan Mario Draghi, the former European Central Bank president, for one or another top job.
This reflects particular hubris in the case of who should succeed Charles Michel as president of the European Council: Michel, part of the same liberal family as Macron, has proven particularly bad at forging consensus among the EU’s 27 leaders. It is difficult to imagine a situation in which the Socialists and Democrats alliance (S&D) would give up their chance to take the top job, informally earmarked by their second-place election finish, for an Italian technocrat who would also have to court Rome’s far-right prime minister, Giorgia Meloni.
Meanwhile, Scholz could deliver two big wins: keeping a German atop the Brussels executive and at the council installing one of his political allies, former Portuguese Prime Minister António Costa, who led Portugal to its best economic performance in 35 years. Yet an initial meeting of leaders failed to reach a deal, reportedly because EPP negotiators got greedy and tried to limit the S&D nominee to one 2.5 year term instead of the customary five-year tenure. This was a big miss for Scholz, despite his optimism that a deal will come together at an end-June summit. After all, the head of the EPP in the European Parliament is also German, MEP Manfred Weber. Scholz should have sat his compatriots down and made sure they were all on the same page about getting von der Leyen confirmed again with no delays.
Perilous Times for the EU
Instead, the attempt to snub the Socialists opened the door to the far right. The jobs lineup first proposed had Estonian liberal Kaja Kallas poised to become the EU’s High Representative for Foreign Affairs and Security Policy. But Kallas herself has doubts, especially now that Meloni’s European Conservatives and Reformists group (ECR) has challenged the EU’s liberals for who will be the third largest party in the new assembly.
All of this politicking weakens the EU amid perilous times. Brussels is already sandwiched between Washington and Beijing on economic matters and is trying, with difficulty, to impose tariffs high enough to defend its credibility while low enough to avoid causing economic disruption. War between Russia and Ukraine continues, raising hard questions about who will pay to support and rebuild Kyiv, as well as how Europe can take more responsibility for its own military security. And finally, the eurozone’s hard-won financial stability could be at risk if new shocks undermine the current equilibrium of national budgets, joint monetary policy, and the incomplete banking union project.
The 20-country common currency has come a long way in the 25 years since its debut. Yet it remains a work in progress. Between 2012 and 2015, a sovereign debt crisis forced five countries to seek international assistance and created enough systemic contagion to force a sea change in financial oversight. The European Central Bank, already the interest-rate arbiter, added centralized bank supervision to its duties when the Single Supervisory Mechanism launched in 2014. Eurozone countries also pledged to join forces on how to handle failing banks and on deposit insurance. Yet the new Single Resolution Mechanism has only been used a few times, and deposit insurance remains entwined with national finances. This fragmentation means savers and investors can’t be fully confident a euro in one country is as safe as one in another, even as the currency area has matured.
The EU’s Crisis-Fighting Toolbox
Both France and Germany are testing the EU’s fiscal bona fides, albeit in different ways. Germany is struggling with slow growth and domestic resistance to the kind of spending needed to jumpstart innovation and fund the green transition. France, on the other hand, already manages a huge public debt and, as of mid-June, has again entered the EU’s excessive deficit procedure. If the far right wins the French parliamentary elections on June 30 and July 7, its high-spend, low tax ideals could break the bank further. Bond markets are nervous.
This has sparked renewed interest in the EU’s crisis-fighting toolbox, unused since 2015 even as policymakers have continued to update and refine available instruments. The ECB now has a Transmission Protection Instrument, a bond-buying tool for countries in good fiscal standing, designed to be activated if volatile market conditions threaten its ability to sell bonds. It also has programs to that could work alongside the European Stability Mechanism, the intergovernmental institution that eurozone members set up outside the EU that allows them to make collective rescue loans to their peers. Because of the conditions required for seeking aid, asking for a rescue comes with a perceived stigma that so far has been hard to overcome. ESM senior officials on June 21 proposed allowing group aid requests so that individual countries would not feel that asking for aid isolated them further.
A better approach is of course for the euro not to need help at all. If the currency as a whole is strong, individual countries can manage their own market access and weather periods of excess and correction. Monetary policy, while arguably too tight for a speedy recovery, can in this case help by keeping the euro stronger than it would be in a time of aggressive rate cuts. Carsten Brzeski, ING’s Frankfurt-based head of global macro strategy, said the ECB’s current inclination to hold off on rate cuts, possibly for the rest of the year, will keep the euro relatively stronger than if there were more aggressive easing. This is the kind of trend that, however undramatic, helps the euro maintain investor confidence. In contrast, whenever the euro takes a big tumble, as in 2015 or 2022, market observers’ thoughts turn to possible collapse.
For now the euro has been on a downward trend given all the political uncertainty, yet without the kind of rout that signals collapse. “The hawkish ECB indeed has prevented the euro from falling further,” Brzeski said. “In the end, if France really gets out of control fiscally and politically, I expect the euro to fall sharply. No matter what the ECB does.”
For von der Leyen, all of this adds up to a chance to make her mark, provided her re-election goes smoothly from here out. The EU needs someone to get its member states working together—and to provide the anchor that voters seem to want from somewhere, even if they don’t see it at home. Paris and Berlin would do well to support her. As it is, it would be good if they can at least not make things worse.
Rebecca Christie is a senior fellow at Bruegel, the Brussels-based economic think tank.
