EU to finance new investment projects with extra borrowing; French and Italian deficits to be tolerated

Embrace between François Hollande, President of the French Republic, and Jean-Claude Juncker, President of the European Commission as from 01/11/2014 in the presence of Angela Merkel, German Federal Chancellor, and Martin Schulz, President of the European Parliament (in the foreground, from left to right). European Council of Brussels, 23-24/10/2014. Discussions focused on getting the right balance in the EU’s approach on the Economy so it could stimulate growth and reduce unemployment. (EC Audiovisual Services, 23/10/2014).

The EU Commission has correctly translated the ideas emanated from the Brussels’ European Council of 23-24 October and accordingly adjourned confrontation with France and Italy over budgetary deficits and extra investment spending for 2015. European Commission Vice President Jyrki Katainen responsible for financial affairs and the euro seems to have read very carefully the Conclusions of the 28 EU leaders’ summit and noticed two things.

Firstly, he saw that the leaders made a very brief reference to government finance orthodoxy and the obligation of member states to reduce budgetary deficits to levels laid down in the Stability and Growth Pact. Secondly, Katainen noticed that in their final communique the 28 leaders devoted a lot of space and articulated lengthy and convincing arguments supporting the need of increased public spending on investments, on both European and national levels.

Katainen took the message

Katainen, being an intelligent politician, didn’t need more signals. Last Tuesday he issued a statement saying plainly that the Commission is not to point a finger to Italy and France over their fiscal deficits, as they are inked in black in the 2015 budgets. Both countries have submitted their plans to the Commission for next year government budgets, flaunting large deficits above the 3% of GDP tolerable limit. The 2013 amendment of the Stability and Growth Pack after the introduction of the ‘two pack Directives’, provides much tougher rules and penalties for excessive deficits. Member states are obliged to submit their budgetary plans for next year by 15 October, as they have already done, and the Commission has to approve or reject them by the end of November.

In view of the widespread speculation in the media about imminent hostilities between Paris and Rome on the one side and Brussels on the other over the 2015 budgets deficits, Katainen had to intervene. He issued a statement saying, “After taking into account all of the further information and improvements communicated to us in recent days, I cannot immediately identify cases of “particularly serious non-compliance” which would oblige us to consider a negative opinion at this stage in the process”. The Commission Vice President clarifies here that there won’t be any ‘non-compliance’ decision at least at ‘this stage of process’.

The European Council reigns

Katainen didn’t leave the issue there. He added that “Any possible further steps under the Stability and Growth Pact will be assessed at a later stage, taking into account the Commission’s Autumn Economic Forecast and the opinions on the draft budgetary plans”. Obviously the Commission states here that Paris and Rome have nothing to fear from Brussels at this stage that is in November. However it was not the EU’s executive arm that decided not to push things to the limits concerning the French and Italian government budgets for 2015.

It was the European Council of the EU leaders of 23-24 October which decided not to press Francois Hollande and Matteo Renzi over budgetary orthodoxy. In the face of it the Council was convened to discuss the ‘2030 CLIMATE AND ENERGY POLICY FRAMEWORK”. As it turned the main theme of discussion was an antithesis; growth spending or financial soundness? The controversy is spearheaded by France and Italy on the one side and Germany on the other, with most of the EU leaders though supporting Hollande and Renzi. The latest enlistment in the ‘growth’ camp is Austria, with Vienna abandoning the Berlin group of fiscal orthodoxy.

Berlin bends

Nevertheless even Germany has lately abandoned its hard-line austere ideology. The architect of this theory, the German minister of Finance Wolfgang Schäuble, has recently accepted that his country and the European Union as a whole need an upsurge of public and private investment spending. He appears now to favour every effort to increase investments, nonetheless without jeopardizing the upper limits of allowed government deficit set by the Growth and Stability Pact at 3% of GDP. Up to now Germany has been strongly advocating zero deficits.

As a result, the final communique of the last European Council devoted a whole paragraph on the Commission President elect Jean-Claude Juncker’s idea of additional €300 billion of investments in the EU. The most important part of it is this: “The European Council supports the incoming Commission’s intention to launch an initiative mobilising 300 billion euro of additional investment from public and private sources over the period 2015-2017”.

More loans

Extra spending of €300bn in three years is not at all a small thing and will certainly be partially financed with extra government borrowing and at the same time increasing deficits by the same amount. There is no other conceivable way to finance new and important investment projects than loans and deficits. Already all EU countries depend on borrowed money. The idea is that they can repay in the good times, if and when they are to come. But let’s return to what the 28 EU leaders have to say in the present.

The Council’s statement goes even further. It states that there is an urgent need to identify “concrete actions to boost investment, including a pipeline of potentially viable projects of European relevance to be realised in the short and medium term”. It’s pretty obvious that something is changing in Brussels. The German backing for a new generation of investment projects of ‘European relevance’ is a major shift of economic strategy that can revive the anaemic economy of the EU.

By the same token, France and Italy will not be persecuted for needing more time to bring their budget deficits at or below the permitted level of 3% of GDP. Two or three more years to do so cannot be considered as a direct violation of the Stability and Growth Pact. Not to forget that Italy has a very good record on that account. Rome, under Mario Monti, had been an excellent student of financial orthodoxy.