The “growth versus austerity” narrative is politically tidy, but misleading. 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 views.
Here is a short guide – with country-specific details – of the key issues on the table, and some of the likely alliances they will create.
The issue is one of the few on which there appears to be broad agreement. Yesterday the European 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 all 27 leaders welcome.
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 for about a month. The Commission claims that this money would create around €180 billion in real terms, once funds leveraged from the private sector have been accounted for. Although broadly uncontroversial, the UK is not convinced by the idea. London has cast doubt on the Commission’s arithmetic, and expressed fears that the EIB itself could be overstretched, given that its final guarantors are euro zone countries which have often seen their credit ratings downgraded in recent months.
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 – could be excluded from the general debt ratio.
Such agreement would allow the golden 3% rule to be broken, where appropriate, giving cash-strapped states some leeway. The Germans have greeted the proposal with scepticism, suggesting that choosing 'growth benefit' schemes might be tricky. Nevertheless, 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.
The 'Golden Rule' debate largely reveals the classic division of eurozone countries. There is opposition to amending it from northern states - led by Germany, and followed by Finland, the Netherlands and Austria - whose credit ratings are stronger. Mediterranean states with weaker credit ratings are more supportive of reform.
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 President Hollande, 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 does not favour this option, and Chancellor Merkel has made clear that access to ESM cash will not be granted to 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 it will be advanced by supportive member states, leaving london to go its own way with key allies such as the Czech Republic, Hungary and Bulgaria.
The positions of the Netherlands and Denmark will be worth watching. Both countries have adopted an agnostic position on the tax, but may soon have to take a decision.
This is the big issue of the evening. German government sources have remained stalwart against any idea of Eurobonds, arguing that they are the wrong solution to the problem. High-ranking German officials say that priority should be given to fiscal convergence – shorthand for more centralised control of the European economy, perhaps through a Brussels-based finance minister.
Germany’s price for mutualising Eurozone debt, it seems, is a mutualisation of prior political decisions about finance. But would France be prepared to pay that price?
Even if it was, how would Germany’s fellow opponents of Eurobonds react? Would Finland surrender decision-making powers to enable the introduction of Eurobonds? Even in Austria, which supports germany, 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 is on the agenda of the dinner discussion, because its upcoming elections could lead to its ejection from the euro zone. The many hypothetical situations surrounding Greece’s future will haunt the summit, but are unlikely to be explicitly addressed. The UK for example believes that its euro zone colleagues will find it politically difficult to introduce Eurobonds.
London also believes that – if Greece leaves the euro zone suddenly, that such a debt instrument may need to be introduced very quickly, to prevent a 'domino effect' of contagion. Greece will thus be at the back of everyone’s minds during the discussions, even if it only merits a short statement by leaders at the end.