Macron: the pity and the chagrin

German Chancellor Angela Merkel has said she is open to some of Macron's ideas, but she will likely be obliged to taper her government's policies to meet the demands of her most probable coalition partners, in particular the liberal Free Democrats (FDP), a party that has been largely critical of the French president's ideas on Europe.

The FDP has articulated the fears of some in the German business community that the eurozone might - under Macron's plans - become in effect a transfer union, where member countries could issue common debt - the so-called eurozone bonds - and that the bill would be picked up by the German taxpayer.

Read more: What are French President Emmanuel Macron's labor reforms

When the eurozone came into being 15 years ago, its two biggest countries had similar living standards, while today Germany's are almost 20 percent higher than those in France. France also struggles from a persistently high unemployment rate, in contrast to its eastern neighbor where joblessness is at a record low.

In this context, Macron wants two main things:

1. for Berlin to agree to stimulate its economy further, on the assumption that it would help French exporters and others.

2. to complete the monetary union project by having a eurozone budget managed by a eurozone parliament and a eurozone finance minister.

In August, Merkel backed Macron's call for a new powerful eurozone finance minister post to oversee economic policy across the bloc. She said the new role could provide "greater coherence" to economic policy. She also backed a plan for an European Monetary Fund (EMF) that would redistribute money within the bloc to where it was needed.

Macron believes that the monetary union suffers from too little centralization and needs its own budget, while Merkel views the bloc's problem as over-centralization and too little national responsibility.

Merkel has backed her Finance Minister Wolfgang Schäuble's proposal to turn the European Stability Mechanism, the eurozone's bailout fund, into the EMF, but she does not see the official possessing "expansive powers."

Its resources would be used to boost eurozone governments' capital subscriptions and expand their ability to borrow. The EMF could then take the place of the ECB and the European Commission in negotiating the terms of financing programs with governments. But Merkel has said she wants a budget of "small contributions" rather than "hundreds of billions of euros."

Macron said in August that the joint budget would amount to "several percentage points of GDP" of the monetary union. It would also allow the currency bloc to issue its own bonds, he said, and help finance public investment, as well as protect against future financial shocks.

An Italian-led group of southern eurozone countries has long called for a common budget, which finances investment to stimulate growth and has a stabilizing effect during economic crises. Macron has said financing for this could be via fresh debt. Merkel has ruled out any mutualization of existing debt.

Wide-ranging reforms needed

But Germany's acceptance of Macron's proposals would be contingent upon his ability to push through tough structural reforms aimed at bringing down France's stubbornly high joblessness and increasing the flexibility of the labor market. Many say the measures are needed to give a boost to France's stagnant economy, characterized by low growth and high deficit rates over the past two decades.  

One of Macron's key economic promises has been to cut France's nonwage costs, in particular by slimming its state pension systems. He has also pledged to give more powers to companies negotiating wage deals with unions and liberalize rules governing overtime work. 

France will implement these deep structural reforms on the proviso that Germany agrees to modest steps towards fiscal federalism in the eurozone. But many in Germany - and far beyond as well - appear skeptical about Macron's ability to achieve his domestic goals.

Still, observers say, Merkel will want to help Macron politically as it is in Germany's interests to see that he is not replaced at the next presidential election in France by Marine Le Pen of the National Front.

Budget targets

The EU requires members to make sure their budget deficit is no more than 3 percent of GDP, but France has repeatedly missed this target in recent years. Against this backdrop, the French government's plan to accelerate economic expansion by slashing taxes and bolstering investment is likely to be another source of concern for deficit hawks. 

Macron has promised €40 billion ($44 billion) in tax breaks to try to kickstart the economy. He also says corporation tax will gradually reduce from 33 percent to 25 percent. And a new wealth tax, aimed at the rich, will not apply to financial investments.

France has one of the largest public sectors in the world, with public spending last year at 56.5 percent of GDP. If Macron is serious about cutting corporation tax, then reining in spending becomes all the more urgent. Macron believes his government can save €60 billion over five years, but it's unclear whether that would be enough to balance the books.