EU Commission accuses Germany of obstructing growth and the banking union

José Manuel Barroso, President of the European Commission in the podium. The EC published country-specific recommendations for Member States along with an overarching communication on what was needed to return to growth and jobs, (EC Audiovisual Services, 29/5/2013).

The European Commission at the Semester Press Conference in Brussels yesterday confirmed in the most official way, what was already known. Belgium, the Netherlands and Portugal, are getting an extension of the deadline to correct their fiscal deficits by one year and France, Poland, Slovenia and Spain by two years. This Semester conference comes in the line of the new procedure of Commission’s controls over EU member states government budgets, as provided by the ‘two pack’ and the ‘six pack’ directives.

This is the new ‘economic governance’ environment of the EU in general and the Eurozone in particular. In this respect the government budgets of the 17 Eurozone countries for next year must first get the green light from the Commission and then be submitted to national Parliaments for approval. As for the other 10 EU member states, their budgets will be scrutinised by the Commission and be commented about sustainability. All 27 budgets are examined under the excessive deficit procedure (EDP) standards.

All those novelties constitute the new ‘economic governance’ environment in the EU and are meant to mend the holes, primarily in the euro area, as far as fiscal deficits and public debts are concerned. What was really new however in yesterday’s Press conference is related to the attitude of Commission President and Vice- President, José Manuel Durão Barroso and Ollie Rehn respectively, towards Germany. Both of them in their introductory speeches referred more than once to this country. They advised the largest EU economy, which is running large financial surpluses in every respect, to spend more internally raising wages and public spending, in order to strengthen the demand at home and thus help grow the ailing economies primarily of Eurozone, through increased imports.

This is the first time that the Brussels Commission is pushing Germany so strongly and openly to do more to help Eurozone and the EU in general, to come out from the current economic recession. Both Barroso and Rehn observed that the corrections of excessive fiscal deficits is going well and noted to this effect, that Italy is exiting EDP despite the fact that the new government is planning to increase public spending to support growth and jobs. Along with Italy, Hungary, Latvia, Lithuania and Romania are also exiting the excessive deficit category.

Rehn

The Vice- President of the Commission, Ollie Rehn, being responsible for Economic and Monetary Affairs and the Euro was very clear about the obligations of Germany towards the rest of Eurozone. He said plainly “it’s clear that we must do whatever it takes to overcome the unemployment crisis and return to recovery and growth in Europe. That’s why we are working for two goals in parallel which are reflected in these Country Specific Recommendations (CSRs): sustainable growth and job creation, and for the gradual consolidation of public finances…It is essential that this process of rebalancing and reform is pursued with determination in all Member States: those with current account deficits and those with current account surpluses. Our recommendations to Germany today include sustaining the conditions that enable wage growth to support domestic demand. This requires, among other steps, reducing high taxes and social security contributions, especially for low wage earners in Germany”.

Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro, (EC Audiovisual Services, 29/5/2013).

This was not just a general remark about what Germany should do to help the rest of Eurozone. Rehn offered to Berlin the main targets of a full economic programme to be followed by the largest economy of the EU. It is the first time that Rehn does that. Until now the antithesis between Commission and Germany was restricted to general comments by Brussels dignitaries, about the obligations of surplus countries. Yesterday the two most important Commission figures on financial matters went in details, proposing to Berlin a concrete action action.

Barroso

While Rehn covered the economic policy field, Barroso spoke about a more general subject that is the enactment of the European Banking Union. This issue has now become the cutting edge in the efforts to create a closer Eurozone, with more mutualisation of financial burdens. On the contrary Germany insists that the Banking Union must be a loose institution, without any aspect of common obligations. In this Teutonic line of thinking every country must take care of its own banks. The Commission and the European Central Bank want a much more effective banking union, with a common financial base supported by the European Stability Mechanism, where Germany is the largest contributor.

In this respect Barroso said “ ’Deficit’ countries need to boost their competitiveness and ‘surplus’ countries need to remove the structural obstacles to the growth of their domestic demand…Indeed, a key problem in many Member States is the lack of access to funding for companies. Without bank funding they can hardly survive… Small and medium-sized enterprises in particular are feeling the pinch as bank loans dry up. Germany is the only country in the European Union where SME lending has risen. The transmission of lower interest rates and the restoration of normal lending to the economy, especially in the periphery of the European Union are still impaired”.

This is a direct hint that Germany is the only country, which fully exploits the cheap credits accorded from the European Central Bank at almost zero cost. In the German ears this may even sound like an accusation and probably was meant like that. What Barroso said however is 100% true. Berlin has been favoured by the ECB in many respects, starting from the central bank’s intervention two years ago to help the German lenders unload their toxic assets in the form of Greek, Irish, Spanish and Italian bonds.

Today despite the fact that the German banks are undercapitalised and face grave problems with their maritime loans, they manage to take full advantage of ECB’s liquidity, like no other Eurozone country. That is why the German SMEs are amply financed on demand. At the same time, in the periphery of Eurozone, SMEs are almost completely cut off from any form of finance.

Obviously the European Commission cannot allow this fragmentation of Eurozone’s financial market to continue. Brussels now openly say that Berlin must understand, the Deutsche Bundesbank, Germany’s central bank, cannot go on insisting that the country risks must remain at today’s levels and be charged to the periphery’s SME loans. It’s not acceptable any more that the Italian SMEs pay three or four times higher interest rates for the same business risks, than their German counterparts. There has to be an end in this unduly advantage for Germany. That is why Barroso and Rehn are so clearly pushing Berlin to concede and accept the creation of an effective and meaningful European Banking Union for all.