EU braced for ‘ideological summit’ on austerity v growth

Summit car arrival.jpg

An EU summit opening in Brussels today (14 March) is expected to see leaders offer conflicting views on the economy, with France’s Socialist President François Hollande leading calls for Europe to loosen the austerity policies adopted in response to the eurozone debt crisis. Hollande will find an unexpected ally in UK Prime Minister David Cameron, who also backs a more “flexible” approach to debt policing.

Two scenarios are possible for the two-day meeting of EU leaders, diplomats said: a quick and quiet meeting without much argument, or an ideological clash between  budget austerity hawks and those favouring a more flexible approach aimed at promoting growth.

The most likely “troublemaker” is French President François Hollande, who has spearheaded a campaign for growth and jobs to balance the fiscal consolidation policies pushed by Germany.

But Italian Prime Minister Mario Monti, who suffered a crushing defeat in the 24-25 February elections, might also raise the issue of damage done to his country by an overdose of austerity.

Other diplomats expect German Chancellor Angela Merkel to remind EU leaders that public deficit rules are there for a reason and that good housekeeping must be maintained in order to ward off the financial market instability that has rocked the eurozone during the past three years, bringing it to the verge of breakup.

The majority of diplomats, however, appear to believe that it will be a quiet summit, preferring to avoid “simplistic” talk of austerity versus growth.

With the German elections due in September and Italy still attempting to form a government, European leaders have little interest in exposing their divisions and inviting punishment from still jumpy financial markets, the argument goes.

An 'ideological clash'?

“Will there be an ideological clash? That’s the one billion dollar question,” a diplomat said.

“If somebody tries open the Pandora’s box and say the EU has to abandon the strategic path followed so far, because we now need growth, there will be a very sensitive situation which would hardly be kept under control,” said the official, who represents a conservative government affiliated to the centre-right European People’s Party (EPP).

And among socialist-led governments, not all favour an ideological clash either. A diplomat from such a country argued at length that the last thing the EU needed was a controversy over austerity versus growth.

“Let’s do our homework first,” the diplomat said. “Then we will see what margin is left for measures supporting growth.”

It is still unclear which heads of state will attend the traditional pre-summit meeting organised by the Party of European Socialists (PES), aimed at fine-tuning the language adopted at the summit. François Hollande is expected to attend and his input has resulted in a unified party line at previous summits.

French sources briefing journalists ahead of the summit said public opinion across Europe had “expectations” about the EU’s response to the deteriorating economic and employment situation, “particularly in the South” where “Europe is associated with austerity.”

Hollande admitted on Tuesday (12 March) that Paris would miss its target to lower the budget deficit below 3% of economic output this year, saying a figure of 3.7% was more likely, in line with European Commission forecasts.

But Hollande said that meeting the deficit target was not an end in itself. "The right economic strategy is to stay on this track without doing anything that can weaken growth," Hollande said while on a visit in the city of Dijon.

"That's the gist of the dialogue that I have undertaken with the European Commission,” the French President said.

Instead of seeking a clash at the summit, Hollande could choose to push wording in the summit conclusions concerning the medium-term limits for structural deficits under the Stability and Growth Pact.

A French source explained that the public debt and deficit situation was different in each member state, and therefore the EU’s response “should be differentiated” and “strike the right balance between expenditure and revenue.”

UK backs 'flexible' approach to debt

UK Prime Minister David Cameron may give Hollande an unexpected helping hand in this debate, with London supporting the view that more “flexibility” is needed with the EU’s strict public debt and deficit rules.

Most countries are borrowing, including the UK, but London is concerned that debt cannot be repaid without growth.

The French are on the same line. Spending that supports growth should not be hindered, Paris believes, otherwise some countries will enter “a vicious circle” where recession causes more spending cuts and fuels more recession.

From the UK’s point of view, public deficits should be seen in a broader context, with targets adjusted to economic cycles.

The goal is to maintain credibility amongst creditors and financial markets, which have sanctioned countries for failing to promote growth while pursuing strict budget policies.

The UK expects France to be given leeway on meeting its deficit goals but not to fund a Mitterrand-style fiscal policy, EURACTIV was told.

Martin Schulz, the President of the European Parliament, said European countries had to re-balance their policies to benefit the people, not just banks. Europe has spent €700 billion rescuing its banks but may have lost an entire generation of young people in the process, Schulz said in a recent interview.

"We saved the banks but are running the risk of losing a generation," said Schulz, a German socialist who is tipped to become the next European Commission President if the centre-left wins the May 2014 European elections.

"We are world champions in cuts, but we have less idea ... when it comes to stimulating growth […] One of the biggest threats to the European Union is that people entirely lose their confidence in the capacity of the EU to solve their problems. And if the younger generation is losing trust, then in my eyes the European Union is in real danger," Schulz told Reuters in an interview published on 11 March.

Stagnant eurozone economies and growing unemployment rates across the EU have turned economic growth into a paramount need for Europe.

Under pressure from Germany, EU leaders have so far focussed their efforts on getting their accounts in order, committing to Draconian austerity plans and signing new treaties and adjustment plans mostly decided in Berlin.

At a June 2012 summit, EU heads of state agreed a "European Growth Pact" worth €120 billion, stressing the importance of restoring economic growth in Europe.

But doubts have been raised about how fresh the money will really be as at least half of the sums will be recycled from existing regional policy funds.

>> Read: Question marks over €120 billion EU 'growth pact'

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