The EU moulds a new compromise for growth and financial sustainability

Jyrki Katainen, Vice-President for Economic and Monetary Affairs and the Euro, was auditioned by the European Parliament. After his hearing, Katainen held a press briefing for the journalists. (EC Audiovisual Services, : 07/10/2014).

Jyrki Katainen, Vice-President for Economic and Monetary Affairs and the Euro, was auditioned by the European Parliament. After his hearing, Katainen held a press briefing for the journalists. (EC Audiovisual Services, : 07/10/2014).

The whole world knows that the European Union has for decades been powered by a strong force; the Berlin – Paris axis. At times, when this  relationship broke down, the EU came to a standstill. Obviously now this is again the case. Towards the end of last month the newly appointed French Prime Minister, Manuel Valls went to Berlin to meet the German Chancellor Angela Merkel. His aim was to convince her that France needs two more years to bring its fiscal deficits at or below the allowed levels, instituted under the new European Economic Governance legislation, adopted in the context of the Economic and Monetary Union.

The rules demand that all Eurozone member states have to limit their fiscal deficits at or below 3% of GDP. Valls’s budgetary planning for France doesn’t aim at curbing deficits to tolerable limits before 2017. In Berlin, Valls was told right away that Germany cannot tolerate such disrespect of fiscal legality from France and was sent away. The Franco-German dispute reached the highest political level last week in Milan, where the 28 EU leaders met to discuss the youth employment issue.

Franco- German standoff
On this occasion, the French President Francois Hollande told the German Chancellor Angela Merkel bluntly that nobody can tell France how to run its economy. He also insisted that the EU must exhaust all limits of flexibility and probably beyond it as foreseen by the Treaty on Stability, Coordination and Governance institutionalizing the Economic and Monetary Union. His obvious target is to revive the faltering French economy with some more public spending and of course the same is true for rest of Eurozone. Some days before that, the French finance minister Michel Sapin had announced that France would not cut its budget deficit below 3% of GDP before 2017, and he estimated the deficit for this year at 4.4% of GDP, and in 2015 at 4.3%.

Quite understandably, the Franco-German stand-off in Milan couldn’t leave the Italian Prime Minister Matteo Renzi indifferent. He intervened and supported Francois Hollande all the way through in his dispute with Angela Merkel. The new French-Italian alliance is anything but a minor force within the European Union. Today’s EU however is not the European Economic Community of the 1960s, when ‘The Empty Chair Crisis’ provoked by Paris could bring chaos to Europe. Nor is France the then political supremo that Germany had to reckon with.

2015 budgetary plans

On top of that, the Brussels of today has a lot of leverage power to bring France to the negotiations table and the EU marshals a heavy-duty conciliatory apparatus that Paris cannot disregard. As things stand now, France, along with all the other 17 euro area countries, had to submit their draft budgetary plans for 2015 with the European Commission for approval by yesterday noon, Wednesday 15 October, under the Economic Governance rules. This said, all the major European media, probably ‘encouraged’ by Berlin, have being speculating for days that the Commission warned France that its draft budget is to be rejected.

In view of all that, Commission Vice-President for Economic and Monetary Affairs and the Euro, Jyrki Katainen had to intervene. After last Monday’s Eurogroup meeting Katainen stated that “The Commission will prepare its opinions on these draft budgetary plans according to the timeline foreseen in the legislation. We all know that there has been a lot of speculation in the press about the content of the Commission’s opinions for certain countries, so let me say this very clearly: this speculation is premature”.

Katainen warns France

The new Economic and Monetary Affairs commissioner, also a Finn like his predecessor Ollie Rehn, with this statement appears rather too cautious if not tough vis-à-vis Paris. Logically in this phrase he leaves an open possibility that the French budgetary plan can be rejected (he termed the relevant press reports just ‘premature’). It’s not only that. He went on and stressed, “It is the Commission’s job to ensure that this framework is upheld and that all Member States are treated equally. It’s a question of fairness and of credibility”. In this way he indirectly accuses France for asking for ‘special treatment’. Not without reason, a lot of analysts classify Finland in the Germanic sphere.

In short, what Katainen does here is to issue a straight warning to France that the country’s budget for 2015 brakes the rules of the Stability and Growth Pact and may face the consequences of Excessive Deficit Procedure. Of course this procedure is not the ‘Inferno’. Italy was in it for years and was let out by the Commission only last spring. However, the Excessive Deficit Procedure is not a comfortable position either for a Eurozone country to be in. Silvio Berlusconi, who as Italy’s Prime Minister amidst the financial crisis, ignored Brussels and the Commission ‘instructions’ to cut down Italy’s budgetary deficits, in less than three years found himself not literally in prison, but doing ‘social work’ under Court’s orders.

The power of conciliation

Going back to France and the next presidential election is set for the spring of 2017, two and a half years from now, a long time especially in French politics. Given that, Francois Hollande cannot easily convince Brussels and Berlin that it is politically impossible for him to cut down budgetary deficits to more acceptable levels before 2017.

This, though, is half the truth, or even less. The prevailing reality is that the European economy is at a deplorable state. This fact hardens the Franco-Italian argument for urgent need of money and measures to support growth and jobs creation. Even Germany has acknowledged that more government spending is needed to mobilise investments in the public and the private sectors.

Wolfgang Schäuble, the German Minister of Finance and architect of European Union’s austerity policies and fiscal sanity, was forced last week to recognise, that more investments are needed to revive Europe’s faltering economy. He accepted that while speaking at the IMF and World Bank annual meetings in Washington during this past weekend.

The end of fiscal strain

There is no doubt any more that austerity has not helped Europe. In the stagnating or receding European economies, the efforts to reduce fiscal deficits has led to less taxes being generated and paid and consequently new deficits being formed. As a result, and in a more realistic line of thinking and unlike Commission Vice President Jyrki Katainen, the Dutch Finance Minister and Eurogroup President Jeroen Dijsselbloem, appears closer to the Franco-Italian position.

After last Monday’s Eurogroup, Dijsselbloem commented: “As you heard coming from discussions in Washington, there are serious concerns about the pace of the global recovery, in particular the low growth and subdued inflation environment in the euro area…There was broad consensus among (Eurogroup) Ministers that the current situation is, however, not satisfactory and requires strong policy actions … Determined action in these areas will, alongside the independent monetary policy of the ECB, safeguard the economic recovery and boost growth and employment…The growth-friendly consolidation strategy should continue…while using the flexibility within the existing rules”.

Can’t leave it to comedians

It’s pretty clear than that Europe is eagerly and urgently looking for a compromise, between the Germanic austere ideology and the need for more relaxed economic policies, to cater for the needs of France, Italy and the rest of south Eurozone countries. Thank God the EU has established by now very strong conciliatory mechanisms and powerful institutions with truly pan-European motivation like the Parliament and the ECB. Despite the reinforcement of Eurosceptic and extremist political formations like UKIP in Britain, Beppe Grillo’s Five Star Movement in Italy, Marine Le Pen’s National Party in France and other anti-EU creatures, the European institutions still have the ability to absorb the diverging tendencies and produce a new synthesis.

History has proved that in most cases the new synthesis is a distorted ‘animal’, which can barely stand on its feet. Nevertheless, the success story of the Common Agricultural Policy – the most important truly common European project before the appearance of the Monetary Union – proves though that there is always a way out from Brussels stalemates, that can serve everybody as an acceptable compromise. The agreement on the creation of the European Banking Union last spring is a further proof of that. It’s most probable then that the key to the new deadlock will be found. Nonetheless, it is also most probable that the millions of the much needed new jobs won’t materialize soon in Europe. Eurozone is already over indebted and cannot finance growth with more debt.

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