Macron's Key Euro Ally Signals Reform Plan Is in Trouble

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(Bloomberg) -- The extent of the problems facing Emmanuel Macron’s plans for European reform was laid bare Monday when Spain, its key ally on the issue, dropped most of its goals citing opposition from Germany.

With Italy hamstrung by political gridlock and Germany stalling publicly, Spain had emerged as the main supporter of the French president’s push for closer integration of the euro area. Now Spain is lowering its sights.

The Spanish government will focus on securing meaningful risk-sharing for the euro-area banking union at the key summit in June and is abandoning its push for a euro-region budget and joint bond issuance this year, an Economy Ministry official said.

The official said even that lesser objective looks challenging because there is no sign yet that the German government is ready to drop its long-standing reservations about pooling banking risk. He asked not to be identified by name, citing government rules.

The new proposal contrasts with the vision offered by Spanish Prime Minister Mariano Rajoy in December when he called for tighter integration and insisted the euro area needs a joint budget, aligning himself with Macron. French Finance Minister Bruno Le Maire visited Madrid this month to shore up support for the program, which has been set back by opposition led by the Netherlands.

German Concerns

Rajoy has a clear set of priorities for the euro area -- deeper financial integration, to be followed by an economic union that paves the way for new shared tools, Spanish Economy Minister Roman Escolano said on Twitter on Monday.

Macron has been betting that German Chancellor Angela Merkel’s new finance minister, Social Democrat Olaf Scholz, would prove more supportive than his predecessor Wolfgang Schaeuble. But the Spanish official said there had been no shift in the German position.

The main target for Spain, and indeed Macron, is to persuade Merkel to agree to a common backstop for euro-area bank deposits in order to create a level playing field for lenders across the region.

Merkel said last week that such a fund may not come into effect until the “more distant future.” A French official said this month that the Macron team expects to find a compromise with the Germans that would see the fund phased in some years in the future so long as all members meet certain conditions on risk reduction.

©2018 Bloomberg L.P.

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