The official blog of BNP Paribas Asset Management

Germany – the impasse over migrants dominates events

Early in the summer major tensions flared up within the German coalition government in a period also marked by German-Franco efforts to advance EU reforms and progress on topics including a common budget, sovereign bond restructuring and banking union.

Early in the summer major tensions flared up within the German coalition government in a period also marked by German-Franco efforts to advance EU reforms and progress on topics including a common budget, sovereign bond restructuring and banking union.

The twist was that this was not between the left and right of the grand coalition, but within the conservative bloc. The leader of the Bavarian CSU and interior minister, Horst Seehofer, favoured a tougher line on migrants entering the country and asked to immediately give police the powers to reject asylum seekers registered in other EU countries at the border. Chancellor Angela Merkel, however, is concerned about the knock-on implications for Austria and Italy and ultimately the chances of building a common European position on the migrant issue.

Although Seehofer threatened to resign during negotiations within the grand coalition, the dispute about refugee policies has remained unresolved. The compromise deal struck between Merkel and Seehofer involves establishing ‘transit zones’ along Germany’s southern border to allow quicker deportations of refugees back to their arrival EU country if that country agrees.

Seeking to avoid a domino effect across Schengen area

Austria warned that it might seal its borders if Germany were to take unilateral decisions at their common border. Bilateral discussions with Austria, Italy and other EU member states on the relocation of refugees are ongoing to seek a solution to stem “secondary movements” of refugees within the EU without triggering a domino effect across the Schengen area.

Tensions over refugee policies could easily re-emerge and political noise will likely dial up ahead of the Bavarian regional election on 14 October, but for now, the CSU is unlikely to bring down the coalition as long as the CDU and SPD unite behind Chancellor Merkel.

The Meseberg Declaration and EU summit

A major development on the policy and politics front in Europe was the German-Franco summit in Meseberg which was meant to foster a breakthrough on eurozone reforms. While Chancellor Merkel and President Macron are publicly committed to a partnership aimed at reinvigorating the EU project, little emerges from the Meseberg Declaration.

For all the optimism over the grand coalition marking a turning point in the German position on Europe and a more relaxed approach to the traditional red lines, the current programme looks modest. The leaders agreed to a eurozone budget, with a focus on boosting investment and convergence, and a stabilisation tool to help member states withstand economic shocks.

However, without a clear commitment on the scale of the budget and with a framework credit line but no fiscal transfers, the absence of any capacity and commitment to a meaningful cross-border stabilisation policy is clear. Moreover, the threat of sovereign bond restructuring is still there – it remains a precondition for support, and the declaration also favours an introduction of Euro CACs (collective action clauses) with single-limb aggregation[1], which materially raises the cost of holdouts and essentially makes it much easier to restructure all bonds in one go.

Many countries may move to dilute Macron/Merkel commitments

As regards a banking union, while there is commitment to share risks in the financial sector, the intention is still to focus on ‘risk reduction’ in the ‘peripheral’ eurozone banking sector first, which will take time. Moreover, there are always other core countries waiting in the wings to dilute the programme even further once Macron has met Merkel half-way.

Indeed, eurozone finance ministers from Austria, Belgium, Estonia, Finland, Ireland, Latvia, Lithuania, Luxembourg and the Netherlands (as well as Denmark and Sweden) have already written to the Eurogroup President to signal their dissatisfaction, repeating the traditional calls for strict conditionality and debt restructuring as an option in the event of support, the concerns over moral hazard with a European budget and the need to reduce sovereign exposures in the banking sector.

While Macron and Merkel set out their vision of the future, the political reality of the present came crowding back in. The growing tensions over migration show little sign of abating, and took centre stage at the EU summit in late June.

Migrant crisis remains centre stage

In his EU summit debut, Italy’s new Prime Minister Conte demanded action on the migrant crisis, temporarily blocking the joint text which set out EU common positions on issues ranging from global trade to security until a migration deal was reached. The summit ended with a fragile consensus on an opaque compromise. The ensuing statement speaks of a ‘shared effort’ on dealing with the migration problem, but only on a voluntary basis.

A tentative deal to create new centres in member states for processing asylum seekers was struck. There is still interest in establishing camps to process migrants before they arrive in the EU, but as yet little detail on how African states will be encouraged to cooperate in this venture, how logistical and security issues would be addressed or how Europe would allocate successful asylum seekers.

To be fair, finding an EU-wide solution on immigration is difficult, particularly given the tough stance of eastern European countries and the complications arising from the current political unease in Italy and Germany.

Although many questions remain, for now the notion of ‘shared effort’ and an agreement that asylum seekers will be seen as arriving ‘in Europe’ represent a somewhat fragile consensus on this divisive issue.

* This article is an extract from the Inflation Linked Bond Outlook for third quarter 2018

[1] See, for example, this explanation from: “Rules currently in place allow repayment modifications if the terms are approved by two sets of majorities. Holders of all the affected bonds voting together must approve changes, as must holders of each bond series separately. Replacing this cumbersome “two-limb” voting procedure with a single-limb aggregation clause requiring a single vote by holders of the affected bonds would make it harder for holdouts to resist debt restructuring attempts when the majority of investors concedes that it’s necessary.”

Weekly insights, straight to your inbox

A round-up of this week's key economic and market trends, and insights on what to expect going forward.

Please enter a valid email
Please check the boxes below to subscribe