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08/12/2016

Berlin and Paris set up group to avert policy clash

EU Priorities 2020

Berlin and Paris set up group to avert policy clash

Michel Sapin (left) and Jeroen Dijsselbloem at the Eurogroup, October 2014. [Council of the European Union]

The German and French economy ministers have asked experts in Berlin and Paris to come up with reform recommendations for both countries in an apparent attempt to avert a full-blown clash between the eurozone heavyweights over economic policy.

In letters signed by Sigmar Gabriel and Emmanuel Macron and seen by Reuters, the two ministers note that the European recovery is lagging that of other advanced economies, raising the risk of a “lost decade” of weak growth, excessively low inflation, high debt and high unemployment.

The letters ask Henrik Enderlein, head of the Jacques Delors Institut in Berlin and a professor at the Hertie School of Governance, and Jean Pisani-Ferry, a French government adviser and former head of the Brussels-based Bruegel think tank, to compile a report by mid-November with concrete reform proposals.

“As the two largest economies in Europe, France and Germany have a particular responsibility and a critical role to play to ensure both a rapid recovery and a strong and sustainable growth going forward,” Gabriel and Macron write.

By asking the two experts to make reform recommendations for both countries, the ministers seem intent on defusing an escalating war of words between Berlin and Paris, in which German officials have repeatedly lectured France on the need for more hard-hitting economic reforms.

France announced earlier this month that it would not bring its deficit down within European Union limits until 2017, four years later than originally pledged, setting up a confrontation with the European Commission.

>> Read: French deficit and public debt will reach new records in 2015

Germany is also under fire for sticking with its ambitious goal for balanced budget next year despite a weakening German and European economy.

Finance Minister Wolfgang Schäuble came under fierce criticism at a meeting of the International Monetary Fund (IMF) in Washington last week for refusing to consider more public investments to stimulate growth.

France, Italy and some other euro nations have been pressing Germany to agree to a Europe-wide initiative to boost investment.

>> Read: Eurozone seeks to soften German opposition to stimulus spending

Titanic

One senior official in Berlin suggested that by proposing the joint reform study Gabriel, a Social Democrat (SPD), was seeking to avert a damaging confrontation between hard-liners in Berlin and the Socialist French government.

“We want a solution that prevents the Titanic from hitting the iceberg,” the official told Reuters.

Another person familiar with the plan said: “We really need to end the France bashing in Germany and the Germany bashing in France by putting forward very specific proposals on what the countries should do.”

Sources said the Chancellery had been briefed on the plan beforehand. Angela Merkel’s spokesman Steffen Seibert told a government news conference that the chancellor welcomed any initiative which might help France in its reform efforts.

>> Read: Germany: ‘We have no interest in humiliating the French’

But a statement from the French economy ministry showed that Paris expects movement from Berlin as well. Macron’s ministry said the request for reform recommendations reflected a desire for a “New Deal” in Europe that included a Europe-wide investment plan to be carried out “in the coming months”.

In their letters to Enderlein and Pisani-Ferry, the ministers ask them to focus on key structural reform needs that could be addressed by 2017, with a focus on investment and modernisation.

They are also asked to outline possible joint Franco-German initiatives that could enhance competitiveness, structural convergence, integration and growth in Europe.

Background

France's deficit is fast becoming problem number one of the Eurozone.

France was supposed to have brought its budget deficit below the EU ceiling of 3 percent of GDP in 2013, but in June 2013 EU finance ministers gave it a two-year extension, until 2015, because of a recession in the euro zone.

While many countries have tightened their belts by laying off civil servants and cutting pay, France has done neither. The country's public deficit remains very large, and the lack of economic growth leaves a diminished tax base.

As a result, speculation has mounted that the European Commission could reject France's 2015 budget draft at the end of October.

>> Read: Excessive deficit fine looms over France

It would be the first time the EU executive exercises its power to demand changes to a national budget draft under new prerogatives that EU countries granted the Commission in 2013.

Timeline

  • Oct. 15: Deadline for EU countries to hand over their draft 2015 budget to the European Commission.
  • Oct. 23-24: EU summit to discuss economic issues

Further Reading