Merkel, Renzi agree on EU budget rules flexibility

Renzi and Merkel. Berlin, March 2014. [Palazzo Chigi/Flickr]

Germany offered Rome a gentler interpretation of EU budget rules in a move seen as ensuring Italy’s backing for the nomination of Jean-Claude Juncker as the next President of the European Commission.

Angela Merkel, the German Chancellor, acknowledged that a European Union pact that sets limits on government deficits should be applied flexibly to promote economic growth.

This gesture to the wishes of Italian Prime Minister Matteo Renzi all but ensures he will back the nomination of Jean-Claude Juncker as the next President of the European Commission at a summit on Friday (27 June).

“The German government agrees that the Stability and Growth Pact offers excellent conditions for (promoting growth and competitiveness), with clear guard rails and limits on the one hand and a lot of instruments allowing flexibility on the other,” Merkel told Germany’s lower house of parliament.

“We must use both just as they have been used in the past.”

New political balance

The tilt in economic policy and the likely appointment of 59-year-old Juncker highlight a new political balance in Europe that is set to shape the EU’s institutions for the next five years, with the risk of Britain drifting away.

Juncker, who was prime minister of Luxembourg for 19 years, has been at the heart of EU decision-making since the early 1990s. But British Prime Minister David Cameron has waged a campaign against Juncker, casting him as an old-school federalist who does not have the skill or energy to breathe new life into the EU.

Cameron renewed his promise in parliament to fight to the end but seems certain to be overwhelmingly defeated in an unprecedented summit vote he has demanded.

>> Read: Cameron vows to fight Juncker ‘to the end’

The leaders of Sweden and the Netherlands, who initially shared Cameron’s reservations, both announced they would not block Juncker and a senior German official forecast “a very large, dominant majority” in favour of the appointment.

>> Read: Opposition to Juncker wanes, Cameron isolated

Grand coalition

The tentative convergence between Italy and Germany points the way towards a German-style “grand coalition” of the centre-left and centre-right at European level, with Renzi, the young reformer, in the frontline with the conservative Merkel.

Renzi, whose centre-left party won a resounding victory in European elections last month, boosting his profile on the EU stage, has made budget flexibility a central issue as he searches for ways to kickstart his flaccid economy.

Sandro Gozi, Italy’s undersecretary for EU affairs, accepted there was no question of altering the 2005 stability pact, just a need to apply it more flexibly to favour investment spending and allow countries implementing growth-enhancing reforms extra time to meet deficit and debt targets.

“No one is asking to revise the pact but to use the rules to their maximum,” he told la Repubblica newspaper.

In a warning shot to placate German fiscal hawks, Merkel’s parliamentary group said Renzi wanted to deviate from the path of stability but Berlin would not allow any “dirty tricks” that put Europe on a “comfortable but fatal debt track”.

Italy takes over the EU’s rotating presidency for six months in July, determined to re-energise the union and change the way it works. In a speech to parliament on Tuesday, Renzi, 39, said he was fed up with the EU acting like a “nagging old aunt”.

Renzi proposed excluding investment and educational costs from the public deficit calculations. French President François Hollande sided with Renzi on 21 June, claiming that reconsidering the role of investments was a wise move.

>> Read: Socialist leaders in concerted push to relax EU budgetary constraints

Social Democrat leaders across Europe have campaigned against austerity in last May's EU elections.

A mini-summit organised on 21 June in Paris saw eight socialist heads of states call for loosening the EU's Stability and Growth Pact, which limits public deficits in the euro zone to 3% of GDP.

The concerted push came just days after Sigmar Gabriel, German vice-Chancellor and a member of the Social Democrat SPD party, advocated giving crisis-ridden countries more time to get their budgets in order.

>> Read: Socialist leaders in concerted push to relax EU budgetary constraints

Italian Prime Minister Matteo Renzi, buoyed by success in the EU elections, has led calls for the EU to take a new direction, saying battered southern economies can take no more of the medicine that has crushed growth and sent unemployment soaring.

He has avoided asking for a change to the bloc's budget rules which limit government deficits and debt, saying all Italy asks is to use the margins for flexibility they already contain.

  • 26-27 June: EU heads of state and government meet in Ypres and Brussels for an EU summit

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