Socialist leaders in concerted push to relax EU budgetary constraints

renzi and hollande

Matteo Renzi meeting with François Hollande in Paris, May 2014 [Palazzo Chigi]

France wants to exclude its reform agenda, the so-called ‘Responsibility Pact’, from public deficit calculations as part of a wider socialist push to reduce budgetary constraints at European level. EURACTIV France reports.

A mini-summit organised on Saturday (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 leaders, who met at the Elysée Palace at the invitation of France’s socialist President François Hollande were: Werner Fayman (Austria), Elio Di Rupo (Belgium), Helle Thorning-Schmidt (Denmark), Matteo Renzi (Italy), Victor Ponta (Romania), Robert Fico, (Slovakia) ,Bohuslav Sobotka (Czech Republic).

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

>> Read: German leaders emphasise unity over Stability Pact course

On the eve of a European Summit on 26-27 June, reducing budgetary constraints will be an essential precondition for the European Socialists to back Jean-Claude Juncker as the next EU Commission president and enter a coalition with the centre-right European People’s Party (EPP).

Concrete measures to reduce budgetary constraints have not been officially proposed, but numerous ideas are on the table.

No treaty change

The Stability and Growth Pact’s 3% rule is a taboo subject, especially in Germany. Moreover, any change to the rules requires changing the EU treaties, which would have to be put to the people.

“It is out of the question to change treaties at the moment, because Europeans would reject it. Instead, we must reorientate Europe in order to win people over,” said Laurent Fabius, France’s foreign minister, on 19 June.

Those in favour of easing budgetary constraints argue that the Stability and Growth Pact leaves room for interpretation as it also has a “growth” component.

In Italy, Prime Minister Matteo Renzi proposed excluding investment and educational costs from the public deficit calculations. François Hollande sided with Renzi on Saturday (21 June), claiming that reconsidering the role of investments was a wise move.

France has toyed with the idea for some time. The government currently has investments amounting to €35 billion for future technologies. Excluding those from public deficit calculations would be “a logical idea because it would allow for future economic growth, and therefore increase GDP and clean up public balance sheets,” said Christophe Blot, researcher at the OFCE, the French economic observatory at SciencesPo university.

Excluding the Responsibility Pact from deficit calculations

There is no lack of ideas on how to reduce budgetary constraints.

One option considered by the French government is to exclude the “Responsibility Pact” from public deficit calculations. The pact was announced earlier this year and plans €50 billion in savings over the next four years.

“It is a series of structural reforms aimed at reducing corporate tax to German levels (28%). It would benefit the Germans, seeing as it is only temporary and is not the permanent method of calculating public deficit,” said a French government source.

Nevertheless, temporarily excluding the Responsibly Pact from EU public deficit rules would be difficult to bring about, as it would require re-evaluating sections of the pact and their effects.

Some European leaders present in Paris want to exclude contributions to the EU budget from public deficit calculations. France contributes €22 billion to the running of the European Union. “It is an absurdity to include this in the deficit, Brussels is shooting itself in the foot by doing so,” said a French socialist MEP.

The French Ministry of Foreign affairs is also re-evaluating the role of military spending, for example, for interventions in Mali and the Central African Republic (CAR). France bore the brunt costs of these interventions even though Europe as a whole benefits from Mali not being run by terrorists. Jean-Yves Le Drian, the French minister of defence, estimates that the CAR military operation will cost France €200 million in 2014.

Inflating GDP figures, the silver bullet

Simultaneously, measures are also being implemented at EU level to artificially inflate GDP figures.

As surprising as it may sound, the European statistical office Eurostat has encouraged member states to include the black market economy into their GDP calculations. From September onwards, countries like Italy, the UK and Spain will be counting their black markets when calculating GDP. However, precise estimations of the black market economy are difficult to obtain because of the lack of official data.

In France, the national statistical office INSEE has been hesitant about the idea, saying only contractual relationships can be taken into account in GDP figures. After internal debates, the French statistical institute finally decided to include estimated data for drug trafficking, but not prostitution.

The effect on GDP and public deficit stats is not insignificant. In France, GDP should rise by €50 billion a year to reach €2,150 billion in total.

“If we add to this the costs of investment for the future or an equivalent increase in deficit, we will win a few percentile points. This would no doubt allow France to reduce its public deficit to 3% of GDP in 2015,” said Christophe Blot.

"Yes, we need more leeway and the fact that the German Vice-Chancellor (Sigmar Gabriel) and the President of the Italian Council (Matteo Renzi) said it, is a good thing," said the French Prime Minister, Manuel Valls, on French radio.

"Since revising the Stability and Growth Pact, there has been more flexibility in the European rules for a country that is committed to long-term structural reforms that are beneficial to all. However, there is a restrictive interpretation of this flexibility, which always favours stability over economic growth," said Sandro Gozi, Italian Minister for European Affairs, during a visit to Paris (19 June).

"Sandro Gozi clearly explained that we must play with the flexibility of European rules," said Harlem Désir, French Minister for European Affairs. "It means the reinterpretation of the rules to suit our priority, which is economic growth."

The Party of European Socialist campaigned against austerity in the European elections.

The European People's Party won the European elections, but must now form a majority with the Social democrats. One of the Socialists’ demands before forming a coalition is to reduce the budgetary constraints of the Stability and Growth Pact.

  • 26-27 July: European summit in Brussels which will examine the nomination of Jean-Claude Juncker as President of the European Commission

Subscribe to our newsletters