Italy’s M.Renzi and Germany’s S. Gabriel veto austerity, ask EU leaders to endorse growth measures

Johannes Hahn, Member of the European Commission in charge of Regional Policy, went to Berlin to participate in a conference on the ‘Partnership Agreement’ with Germany on using EU Structural and Investment Funds for growth and jobs in 2014-2020. The other participants of the event included Sigmar Gabriel, German Federal Minister for Economic Affairs and Energy (on the right), and Christian Schmidt, German Federal Minister for Food and Agriculture (on the left). (EC Audiovisual Services, 06/06/2014).

At last there are signs of relaxation of Eurozone’s tight fiscal constrains to growth. Italy, Portugal, Spain, Ireland and Greece are not the only Eurozone members that display now a de facto rejection of the strict financial confines imposed on them by Brussels since 2010. France too and other EU member states seem quite reluctant to continue following the Germanic recipe of austerity, which has so far invariably led more than half of euro area countries to unprecedented unemployment rates, stagnation even recession. Actually Herman Van Rompuy, the President of the European Council went yesterday to Rome to discuss with the Italian government the restructuring of the EU fiscal restrictions. Let’s take one thing at a time.

It’s not only the usual grouchiness of the south Europeans that opens the road to a new economic strategy. The positive signs towards this direction come now from Germany itself. Last Monday, Sigmar Gabriel, the German Federal Minister for Economic Affairs and Energy, Vice Chancellor of Germany and chairman of the Social Democratic Party (SDP) left to be clearly understood that Europe must realistically support the countries which are trying hard to reduce their fiscal deficits, by giving them a chance to start growing again.

Supporting their efforts

Gabriel was speaking in the city of Toulouse in the presence of his fellow French Minister of Industrial Renewal, Arnaud Montebourg. The latter couldn’t agree more on that. To be reminded that as from autumn of 2013 the German SDP party governs the largest economy of Eurozone in a ‘grand coalition’ with Chancellor Angela Merkel’s conservative Christian Democrats (CDU). Wolfgang Schaeuble, the conservative Federal Minister is the architect of the currently applied EU rules for austerity and fiscal tightening. Schaeuble has been insisting for years that the strict fiscal rules have to be meticulously enforced. He also believes that growth cannot be generated by monetary easing and fiscal deficits but only by hard labour and moderate wages.

However last Monday the German Vice Chancellor didn’t limit himself to generalities about how to make things easier for those Europeans in dire straits. He took the pain to go into details to explain what he meant, by the ‘practical support’ to countries with growth problems. Many member states are vigorously applying fiscal consolidation measures, but at a great cost of unbearably high unemployment and GDP losses. Under European Union rules, all member states have to reduce their government budget gaps to 3% or less of their gross domestic product. The European Commission has demanded that France has to do that until 2015.

What will change now?

To this effect Gabriel stated that, “A the solution could be that the costs connected to reform policies and measures would not be taken into account in calculating the deficit”. Then he added, “Of course none can accept deficits at their present levels, yet in order to control discrepancies we need growth, we need jobs”. Gabriel concluded like that, “The ones who show determination to carry out reforms, should be given time to do the restructurings and then comply with deficit criteria”.

The growth and wider economic dead ends associated to austerity and fiscal consolidation policies applied for three years are now reaching also a political climax. The new Italian Prime Minister Matteo Renzi, strengthened by a strong 40% auspicious result in the May European Elections has clarified to his EU fellow leaders that Italy cannot go on like that. Besides the boldness of the Italian PM, Brussels have to cope with the fact that his country is a founding and core member of the EU and its problems are Eurozone’s predicaments. The Italian government debt has skyrocketed at 130% at the limits of unsustainability. It can only be bloodlessly served, if the economy starts growing again. Under this undisputable reality fiscal and austerity rules have to bend.

Italy cannot wait

Renzi knows all that very well. So he is about not only to transform his country’s problems into European ones, but he also very coldly conditions the likely economic solutions to be offered to Italy by Brussels and Berlin with the very functioning of the European Union. According to well-informed sources Renzi made clear to the German Chancellor Angela Merkel that he would support the candidacy of Jean-Claude Juncker for the Presidency of the Commission, only if the Brussels bureaucrats come across an interpretation of EU fiscal rules, in a satisfactory way to satisfy Italy’s demands for return to growth policies. The German Chancellor has made the candidacy of Juncker her banner, in order to unswervingly counter the campaign initiated by the British Prime Minister David Cameron against the Luxembourgish politician’s candidacy. In this confrontation she cannot win the fight without Italy at her side.

Swoboda confirms it

Similar information came from another source. Yesterday, Hannes Swoboda, Chair of Group of the Progressive Alliance of Socialists and Democrats (S&D) in the European Parliament, a member of Austria’s social democratic party, attested Renzi’s positions. The outgoing President of the S&D European parliament group straightforwardly stated in an interview that, “We are in contact with PM Renzi in order to formulate a text so as the EU Fiscal Pact (Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, which applies in full to the countries whose currency is the euro) becomes more flexible without abandoning the long term target of debt reduction”. Presumably such an important text will be adopted by the EU heads of states or governments in the next European Council of 26 and 27 June 2014.

There is no doubt that something is changing in the European Union. Unquestionably Italy is not alone in demanding a relaxation of the currently in force Teutonic austerity and fiscal discipline. France is with her, together with the entire southern EU countries. Even the International Monetary Fund is now changing course. The Fund’s head of the European department, Reza Moghadam, said “focusing mainly on the debt burden would give EU governments the needed flexibility to lead their economies to growth, while retaining the confidence of markets and making the rules understandable to citizens”.

Hopefully before the end of this month a new post crisis era will down for euro area and the entire Europe. By solving the growth deadlock the Union, and more particularly Germany, will prove that they can also stand the pressures stemming from the Ukrainian crisis.