Former Minister for the Economy, Emmanuel Macron, defeated the populist Euro-skeptic candidate Marine Le Pen. He did this by taking more than 60% of the French Presidential runoff vote. At age 39, he is the youngest President in the history of the Republic and he had never held an elected office. He proposes to reform France by taking the best ideas from the left and from the right. There has been much discussion about what this may mean for France. We believe the more important question is: what does this mean for the Eurozone?

The Euro came into existence on January 1, 1999. The notion of a single European currency was discussed by the League of Nations in 1929 in the aftermath of the First World War on the belief that economic integration and a common currency would create an impediment to military aggression. After the Second World War, the movement gained momentum and after years of analysis, planning and negotiations, a monetary union was created and over the years has expanded its membership.

To be clear, the impetus for the union was political. The focus has been on centralizing monetary policy that is established and carried out by the European Central Bank (ECB). The agreement signed in Maastricht established limits for budget deficits, but was so contentious that framers agreed to forgo the creation of a fiscal union for fear of failing to achieve even a partial deal.

Some describe the resulting situation as a 2-legged stool. There is a centralized political body, the European Union, which sets rules for economic integration and a monetary institution, the ECB. The member countries are entirely on their own, within limits, with regard to fiscal measures such as public spending and taxation. More recently there has been progress toward a banking union with a centralized facility to stabilize and regulate banks plus deposit insurance.

Germany and then France, are the two largest economies in the Eurozone. Companies headquartered in Germany and France benefit greatly from the preservation of the Euro.

The great financial recession nearly destroyed the Euro. Greece defaulted. Ireland, Portugal, Spain, and Italy all needed support from the ECB and the International Monetary Fund (IMF). Ireland has since recovered. Spain’s economy has expanded after a period of austerity but unemployment remains extremely high. Meanwhile, Portugal and Italy have languished. Banks suffered in the great recession and governments loaded up on debt when they assisted the troubled banks.

In the United States, when a particular state or region goes into recession, targeted fiscal stimulus can be applied to aid an industry (as with the cash for clunkers program to help the auto industry) or can aid a particular place via the construction of transportation projects to create jobs. Monetary levers used to increase or lower the benchmark borrowing rate to control economic growth is a blunt instrument. For example, lower interest rates are of little help to a homeowner who is failing to make mortgage payments because he has lost his job. The absence of fiscal levers has led to a protracted stagnation among the peripheral countries and has created a challenging environment for the stronger countries, like Germany, who would benefit from exporting to their other Eurozone neighbors.