The “growth versus austerity” narrative is politically tidy, but misleading, and although there are some fundamental differences between Merkel and Hollande’s positions, the informal summit will be a key opportunity for the pair to marshal allies behind their positions, and for the other member states to proffer their own views.
Here is a short guide – with some country-specific details set out below – of the key issues on the table tonight, and some of the likely alliances behind those views.
Project Bonds
The issue is one of the few on which there appears to be broad agreement. Yesterday the Parliament and Council approved a pilot scheme for the financing instruments to be launched. Although leaders are not expected to come to any decisions this evening, expect Council President Van Rompuy to hail project bonds as one of the mechanisms that the 27 leaders all welcome.
EIB Financing
For around a month the idea of injecting a further €10 billion into the European Investment Bank with a view to leveraging this sum to generate investment funds has been on the table in Brussels. The Commission claims that this money would create around €180 billion in real terms, once private sector and generated leverage were accounted for. The idea is broadly uncontroversial, but the UK is not convinced. It has cast doubt on the Commission’s arithmetic, and also expressed fears that the EIB itself should not be overstretched, given that its final guarantors are eurozone countries which have increasingly seen their credit ratings downgraded in recent months.
Golden Rule
This is the main idea that Mario Monti, the technocratic Italian Prime Minister, will be bringing to the summit. He wants to see the deficit limits of 3% of GDP subjected to a new modification, whereby cash spent by member states on certain sectors where there is a growth benefit to be accrued – such as infrastructure schemes – can be excluded from the general debt ratio.
Such agreement would allow to break the golden 3% rule, when appropriate, giving cash strapped states some leeway. The Germans have greeted the proposal with skepticism, suggesting that choosing schemes under this scheme may be tricky. Neverthless Mario Monti has become a significant part of the new European equation, and both Merkel and Hollande will be eager to see him throw his weight behind them on their so-called ‘red-line’ issues.
This issue generally sees the classic division of eurozone countries: those against being the northern states, led by Germany, with Finland the Netherlands and Austria, whose ratings are stronger, and the weaker, Mediterranean states.
European Stability Mechanism
This will come into force at the beginning of July, and is supposed to be used as a bail-out fund, but Holland, aware of the current banking crisis in Spain, suggested last week that the fund could also be used as a way to prop up banks in need of sudden cash injections. Germany is not in favour, and Merkel has made clear to Hollande that no access will be granted to ESM cash for those countries that have not yet ratified the fiscal compact.
Financial Transaction Tax
The proposal to impose a levy on European financial transactions is back, less than three months after the UK, with a slightly ambiguous group of allies, fought it off during a finance ministers meeting in February. Hollande has put the tax back on the agenda, and the UK may well find that the tax will be pushed forward by those member states that want it, leaving it to go its own way with key allies the Czech Republic, Hungary and Bulgaria.
The positions of the Netherlands and Denmark will be worth watching. Both countries adopted an ambiguous position on the tax up to now, but it could soon be time for them to decide.
Eurobonds
This is the big issue of the evening. German government sources have remained stalwart against any idea of Eurobonds.
They are not the right solution to the problem, they say. Meanwhile high-ranking German officials mention that fiscal convergence – shorthand for control of the European economy from a more central perspective, perhaps through a Brussels-based finance minister – is a priority.
Germany’s price for mutualising Eurozone debt, it seems, is to mutualise political decisions over finance beforehand.
Would France be prepared to pay that price? Even if it was, how would Germany’s allies in the resistance against Eurobonds react: would Finland surrender decision-making powers to enable the introduction of Eurobonds? Even in Austria, which supports Merkel broadly on the issue, there is internal wrangling between the socialist Chancellor, Werner Faymann, and his centre-right finance minister, the outspoken Maria Fekter. He favours Eurobonds, she does not.
Greece
Greece is on the agenda of the dinner discussion, insofar as it is in the throes of a political limbo from which it might emerge after upcoming elections to be ejected from the eurozone. The many hypothetical situations surrounding Greece’s future thus haunt the summit, but are unlikely to be explicitly addressed. The UK for example believes that its eurozone colleagues will find it difficult politically to introduce Eurobonds.
It also believes that – if Greece leaves the eurozone suddenly, then such a debt instrument may need to be introduced very quickly as a reassurance mechanism that the eurozone will not suffer a domino-effect contagion. Greece will therefore be at the back of everyone’s minds during the discussions, even if it only merits a short statement by leaders at the end of the dinner.
