The Eurogroup protects Germany and blames others

From left to right, in the foreground: Pierre Moscovici, French Minister of Finance, Jeroen Dijsselbloem, President of the Eurogroup. (Council of the European Union photographic library, 22/11/2013).

Last week in Brussels, an unseen before procedure took place, during last Friday’s Eurogroup of the 17 euro area member states council of Finance ministers. The 17 politicians assessed the Commission‘s opinions on member states’ draft budgets, ahead of those draft budgetary exercises been discussed in national Parliaments. This is the EU’s ‘brave’ new economic governance procedure, along the lines provided by the ‘Two Pack’ regulations, imposing a new regime in Eurozone’s fiscal reality.

The ‘Two-Pack‘ regulations entered into force on 30 May 2013 covering all 17 euro area Member States. The new strict fiscal rules for euro area countries are meant to reinforce the Stability and Growth Pact (SGP), which in its initial form failed to restrict budget deficits and public debt below 3% and 60% of GDP, respectively. The SGP framework was launched together with the introduction of the euro and was supposed to offer a solid fiscal base for the new currency. It failed to deliver results and the euro area debt crisis of 2009 broke out. Consequently the EU had to introduce new checks, controls and penalties to oblige member states to comply with the rules. The task to assess the adaptation of national budgets in the new regulatory environment has been bestowed to the European Commission.

The Commission’s assessments

In this context, the 17 Eurozone member states submitted by 15 October their draft 2014 budgets to the Commission for appraisal. Last Friday the Eurogroup gathered to discuss the relevant opinions issued by the Commission. To this effect the draft 2014 budgets of 13 euro area member states were on the table. The other four countries, namely Greece, Ireland, Portugal and Cyprus, are under troika (EC, ECB, IMF) macroeconomic austerity programmes and are monitored through other procedures. The troika of the European Commission, the European Central Bank and the International Monetary Fund is overlooking the restructuring of those four economies and at the same time provides the necessary funding to cover their obligations.

Returning now to the 13 member states, the draft budgets of which were under scrutiny by the Commission during the past four weeks, all of them passed the test and none was judged as non-compliant. However according to Eurogroup President Jeroen Dijsselbloem, minister for Finance of Holland, the Eurogroup “dedicated most of its time this afternoon in the meeting to those Member States that were found not fully compliant and asked ministers to present their budgetary strategy in reaction…We therefore invited those Member States to take – as appropriate – additional consolidation measures within their national budgetary process, or in parallel. These Member States are in particular Spain, Italy, Malta and Finland”.

Issuing orders

The Eurogroup also commented on some other member states’ draft budgets, issuing recommendations with varying degrees of severity. Olli Rehn, Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro had a special comment to make on France. He said “In the case of France, given its importance as the second economy of the euro area, I very much hope that next year will also see an acceleration of economic reforms to lift sustainable growth and job creation, because that is what the French people are expecting”. It must be noted that the Eurogroup has accorded to France a two year deadline extension to bring its fiscal deficit below the 3% benchmark by 2015.

No comment was uttered however about Germany’s excess trade surpluses. On many occasions during the past few months the European Commission has criticised Germany for its excess trade surpluses. The ECOFIN council had observed once that “In the context of the 2013 European Semester, the Council of Ministers recommended to Germany to sustain conditions that enable wage growth to support domestic demand, for example by reducing high taxes and social security contributions, especially for low-wage earners”.

Nothing on Germany

These recommendations came after it was confirmed that Germany has produced external imbalances during the past years. According to the rules of the Macroeconomic Imbalance Procedure a 3 year average of the current account balance as a percentage of GDP, should be within the indicative thresholds of +6% and – 4%. The Commission noted that an “In-depth reviews will also be prepared for Germany and Luxembourg in order to better scrutinise their external positions and analyse internal developments, and conclude whether either of these countries is experiencing imbalances…However, Germany has made no progress in addressing the structural part of the fiscal recommendations issued by the Council in the context of the 2013 European Semester”.

Despite all that, not a word was pronounced about German imbalances during last Friday’s Eurogroup. It seems that Germany is much stronger in the Eurogroup of the 17 than in the ECOFIN of the 28 ministers of Finance. As noted above the ECOFIN has recommended to Germany to sustain conditions that enable wage growth to support domestic demand“, but the Eurogroup didn’t even repeat that.

Germany has frozen its incomes policies for at least five years, in order to increase its competitiveness. By doing this however it indirectly exploited its trade partners, mainly in Eurozone. More than once the IMF and the Commission have asked Germany to do more to help Eurozone start growing again, by taking measures to enhance its internal demand through income and real investment increases. In this way this country can help its trading partners export more. Berlin has answered bluntly to this criticism, boasting about the high quality and the competitiveness of its cars and machinery. Unfortunately, last Friday’s Eurogroup didn’t find a word to tell about all that.