Germany and the newly appointed European Commission have different visions for Europe’s future, which has caused tension between the two, writes global intelligence company Strafor.
Germany’s frustrations with the European Commission have steadily grown. The Commission is the administrative branch of the European Union, and its influence has increased since the beginning of the European project. Though the European Council, composed of the heads of member states, still guides key decisions, the Commission keeps the Continent functional. The institution is made up of 28 Commissioners, each appointed by a member state and put in charge of a department by the European Commission president. The European Council normally chooses the president, but a controversial new system enables the European Parliament to produce the list of candidates from which the council chooses a leader. Jean-Claude Juncker, a former Luxembourg prime minister and a staunch integrationist, emerged from this selection process as the most recent Commission president.
The new Commission, led by Juncker, took up duty on 1 November 2014. But Juncker’s selection of the new Commission was controversial because in trying to avoid conflict, he put country representatives in control of the issues that most affected them. For example, the United Kingdom’s Jonathan Hill was put in control of financial services regulation when it could be argued that London was in the most need of regulation; Greece, with its porous eastern border, headed immigration; and former French Finance Minister Pierre Moscovici was placed in charge of economic affairs.
Moscovici’s first task was to propose appropriate penalties for government overspending, of which France and Italy were the main offenders. Germany, the driving force behind the tightening of budgetary rules in 2012, now saw responsibility for their enforcement handed to a man who had repeatedly broken the rules while finance minister of France.
Moreover, the German Commissioner, Gunther Oettinger, was moved from the key energy portfolio to digital economy, a move described by a German member of parliament as a “resounding slap in the face” for German Chancellor Angela Merkel’s government. In response to the criticism, six new vice presidential positions were created as an extra layer of oversight between the Commissioners and Juncker. Some speculated that this group would be the real center of power and would be able to rein in the dovish Moscovici.
In November, the new Commission faced its first test when France and Italy submitted budgets that failed to conform to Europe’s rules, a sanctionable offense — particularly for France, a repeat offender. The Commission postponed its final judgment until March, officially to give France and Italy enough time to pass adjustments through their parliaments. In January, however, Juncker introduced new guidelines to allow more flexibility to interpret the rules. The guidelines granted leniency for countries in recession and more leeway in exchange for structural reforms.
According to a German media report, Merkel considered the rushed changes a stealthy move by Juncker. Under the new guidelines, the Commission approved Italy’s budget and gave France an extra two years to reach the required deficit levels. But Commissioners also required France to save an additional 0.2% of gross domestic product over the next three months to receive its full reprieve. Media leaks later revealed that a faction within the Commission led by the hawkish Commission Vice President Valdis Dombrovskis opposed Moscovici’s concessions to France and argued strongly in favor of sanctioning the country. However, Juncker reportedly intervened on Moscovici’s behalf, countering the idea that the six vice presidents were the real power brokers in Juncker’s Commission.
The German perspective
Germany’s stance on fiscal responsibility is well known. From Europe’s perspective, economic problems are the result of fiscal waste in the peripheral countries. For Germany, part of the solution was pushing periphery countries to undertake reform and internal devaluation to regain competitiveness and to control high debt levels. Such conditions were attached to the bailouts for Greece, Ireland, Portugal, Cyprus and Spain. But Germany was unable to directly influence the policies of France and Italy, which dodged bailouts. For these countries, a tightening of the fiscal requirements enforced by the European Commission was the only option for bringing them into line, and the Fiscal Compact of 2012 did just that.
The Commission’s relaxed approach to these rules lets Europe’s second and third biggest economies off the hook and pushes Germany one step closer to a so-called transfer union, a scenario in which it might be the one that ultimately pays the bill for Europe’s overspending. The perceived European weakness when it comes Greece has caused splits within Germany’s ruling parties. For example, the Christian Social Union’s vice chairman resigned on 31 March and could join the euroskeptic Alternative for Germany party. Though he did not cite the Commission’s lenience with France and Italy or the European Central Bank’s recent decision to undertake quantitative easing in his resignation letter, they both likely factored into his decision.
To understand the Commission’s motives, it is necessary to understand its position in Europe. As an entirely European construct, its fate is tied to that of the European project. If the European Union collapses, the Commission ceases to exist, and, conversely, the more unified and powerful the union becomes, the more powerful the Commission. Thus the Commission, most notably under the presidency of Jaques Delors in the late 1980s, has historically been a strong voice for an ever closer union — a key European tenet. From the Commission’s perspective, a “United States of Europe,” where resources were allocated to where they were most needed within the union, would be ideal. Thus, Juncker’s controversial Commission appointments coupled with a wave of anti-austerity sentiment in Europe have pitted it firmly against Germany, which is firmly against the idea of a transfer union.
How the confrontation unfolds depends on whether France and Italy decide to further test the Commission’s resolve over budgetary enforcement. In early March, French President Francois Hollande expressed willingness to find the requisite €4 billion in new savings before the June deadline, but he also reaffirmed that he would not allow tax hikes in 2015, 2016 or 2017.
The next battle, however, is likely to involve Italy. As part of a new law passed in December, Italy said it would sharply raise the value-added tax if the agreed upon spending cuts failed to tame its budgetary deficit. According to the Confederation of Italian Industry’s growth estimates, the Italian government is now set to fall short. This will trigger a hike in value-added taxes to 24% in 2016, 25% in 2017 and 25.5% in 2018. Italian Economy Minister Pier Carlo Padoan has said, however, that the government intends to avoid the tax increase, and there are reports that both he and Italian Prime Minister Matteo Renzi will seek further talks with the European Commission on the subject.
If that occurs, the Commission will again find itself divided between its more accommodative instincts and Europe’s austerity brigade led by Germany. Under such circumstances, the Commission would likely default to its more accommodative stance, inciting even more anti-EU backlash in Germany.