• The most tangible outcome of the Franco-German summit was an agreement to establish a eurozone budget by 2021, a policy traditionally championed by Macron and resisted by Merkel.
• While signaling an acceleration of the EU fiscal reform process, the budget's ultimate size and scope are likely to be far less extensive than initially intended by the French president.
• The European Council summit on 28-29 June will provide further details on the eurozone budget and level of commitment from other EU member states.

Following a meeting on 19 June, the French and German leaders jointly expressed their agreement over the broad direction that EU integration should take. Differences on the extent of the policies and structures necessary to achieve those goals nevertheless remain. Overall, French President Emmanuel Macron's ambitious reform plans envisage a two-speed Europe that would significantly increase the power of the European Commission, particularly on fiscal policy, and facilitate collaboration of smaller groups of EU member states on issues where broader consensus is unachievable. German Chancellor Angela Merkel continues to endorse a more inter-governmental approach instead, in which member states retain their current level of influence vis-à-vis the Commission. The Franco-German bilateral meeting established the broad direction the leaders intend to pursue, which offers a compromise between the two positions. The most tangible outcome of the summit was an agreement to establish a eurozone budget by 2021, a policy traditionally championed by Macron and resisted by Merkel.

Eurozone budget proposal making headway
The objective of a common eurozone budget is to enable joint investments in human capital and innovation, thus promoting eurozone competitiveness and convergence. Aside from national contributions, Merkel and Macron suggested that revenue would come from a newly introduced financial transaction tax (FTT) and/or additional levies on technology companies. Nevertheless, a eurozone-wide FTT, EU-wide taxes on technology giants, and a harmonized corporate tax system all remain highly contentious proposals that have been rejected by an array of EU member states (see Ireland: 12 September 2017:Technology multinationals' EU tax arrangements to be challenged by renewed efforts to tackle tax-avoidance schemes). The successful implementation of such a funding plan would therefore be highly problematic. Another initiative to have emerged from the Franco-German meeting was a proposed overhaul of the eurozone's bailout fund, the European Stability Mechanism (ESM), which was introduced in 2012 as a response to the eurozone's financial downturn. A restructured European monetary fund would have the aim of better protecting the euro currency from future crises while offering short-term credit lines to countries facing financial difficulties. The summit did not offer conclusions on Macron's other ideas, such as the nomination of a eurozone finance minister or enhanced eurozone independence by creating additional governance mechanisms through a separate assembly.

Merkel's more vocal support for an array of French-driven policy initiatives of late, following initial slow progress on Macron's envisaged eurozone reforms, is likely to have been driven by both a shift in German government dynamics and a wider increase in anti-EU sentiment across the continent. The latter is clearly a motivating factor behind Merkel' and Macron's push to revive the Franco-German relationship at the core of EU integration. This vision goes beyond fiscal reforms and has gained more urgency following recent developments such as Brexit, the establishment of a eurosceptic Italian coalition government, and strong electoral performances by parties such as the National Front (Front National: FN) in France and the Alternative for Germany (Alternative für Deutschland: AfD).

In Germany, Merkel is conditioned by the fact that her coalition partner, the center-left Social Democratic Party (Sozialdemokratische Partei Deutschlands: SPD), now holds the finance ministry - crucial in shaping Germany's stance on EU fiscal policies. Increased SPD influence is likely to further translate into a mildly more integrationist approach to the eurozone and financial markets overall - a move likely to be opposed by some Central European EU member states, such as the Czech Republic, Hungary, and Poland, which generally oppose further integration. Germany's usually cautious approach to increased risk-sharing and its demands for more market discipline across the EU are likely to become more balanced with efforts to accommodate EU member states that are calling for more financial solidarity, a softer approach to budget deficits, and improved eurozone safety nets. However, Finance Minister Olaf Scholz (SPD) is likely to broadly continue the overall fiscally conservative and often austerity-driven approach of his predecessor Wolfgang Schäuble (CDU) with the aim of guaranteeing financial discipline.

Outlook and implications
Although the details around the eurozone budget proposal remain vague, it does appear that in return for progress on the initiative, the French side has made major concessions to Germany early on in terms of the ultimate size and scope of the budget. Whereas Macron had initially favored the creation of funds worth hundreds of billions of euro, Merkel instead spoke of dozens of billions. It is also likely that eurozone members will have to adhere to strict - but as-yet unspecified - conditions to be eligible for such funds, a key element to determining the joint budget's future impact. Overall, the budget proposal, while seeming an apparent first victory for Macron and his reforming ambitions, is likely to be far less extensive than initially intended by the French president. Nevertheless, Merkel's new-found willingness to back the budget and the other aforementioned policy initiatives does signal an acceleration, albeit a mild one, of the EU fiscal reform process.

A first indicator to assess the potential of Franco-German reforms will be the immediate reactions in other member states, as the stances of national governments will be crucial in any EU legislative advancements. Another key event will be the upcoming European Council meeting due to take place on 28-29 June. Aside from eurozone reform, other economic and financial policy priorities include the EU's next multi-annual financial framework, taxation, and the completion of the banking union. EU leaders are also expected to endorse the European Commission's country-specific recommendations for 2018, monitoring member-state budgets in the context of the so-called European Semester.