Fault lines at EU leaders’ dinner for growth

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This article is part of our special report Jobs and Growth.

The informal summit for growth tonight [24 May] has been widely touted as a showdown between the ‘austerity’ policies advocated by German Chancellor Angela Merkel, and the 'growth agenda' of newly elected French President François Hollande. EURACTIV's network reports.

The “growth versus austerity” narrative is politically tidy, but misleading. Although there are some fundamental differences between Merkel and Hollande’s positions, the informal summit will be a key opportunity for the pair to marshal allies behind their positions, and for the other member states to proffer their views.

Here is a short guide – with country-specific details – of the key issues on the table, and some of the likely alliances they will create.

Project Bonds

The issue is one of the few on which there appears to be broad agreement. Yesterday the European Parliament and Council approved a pilot scheme for the financing instruments to be launched. Although leaders are not expected to come to any decisions this evening, expect Council President Van Rompuy to hail project bonds as one of the mechanisms that all 27 leaders welcome.

EIB Financing

The idea of injecting a further €10 billion into the European Investment Bank with a view to leveraging this sum to generate investment funds has been on the table in Brussels for about a month. The Commission claims that this money would create around €180 billion in real terms, once funds leveraged from the private sector have been accounted for. Although broadly uncontroversial, the UK is not convinced by the idea. London has cast doubt on the Commission’s arithmetic, and expressed fears that the EIB itself could be overstretched, given that its final guarantors are euro zone countries which have often seen their credit ratings downgraded in recent months.

Golden Rule

This is the main idea that Mario Monti, the technocratic Italian Prime Minister, will be bringing to the summit. He wants to see the deficit limits of 3% of GDP subjected to a new modification, whereby cash spent by member states on certain sectors where there is a growth benefit to be accrued – such as infrastructure schemes – could be excluded from the general debt ratio.

Such agreement would allow the golden 3% rule to be broken, where appropriate, giving cash-strapped states some leeway.  The Germans have greeted the proposal with scepticism, suggesting that choosing 'growth benefit' schemes might be tricky. Nevertheless, Mario Monti has become a significant part of the new European equation, and both Merkel and Hollande will be eager to see him throw his weight behind them on their so-called ‘red-line’ issues.

The 'Golden Rule' debate largely reveals the classic division of eurozone countries. There is opposition to amending it from northern states – led by Germany, and followed by Finland, the Netherlands and Austria – whose credit ratings are stronger. Mediterranean states with weaker credit ratings are more supportive of reform.

European Stability Mechanism

This will come into force at the beginning of July, and is supposed to be used as a bail-out fund. But President Hollande, aware of the current banking crisis in Spain, suggested last week that the fund could also be used as a way to prop up banks in need of sudden cash injections. Germany does not favour this option, and Chancellor Merkel has made clear that access to ESM cash will not be granted to countries that have not yet ratified the fiscal compact.

Financial Transaction Tax

The proposal to impose a levy on European financial transactions is back, less than three months after the UK, with a slightly ambiguous group of allies, fought it off during a finance ministers meeting in February. Hollande has put the tax back on the agenda, and the UK may well find that it will be advanced by supportive member states, leaving london to go its own way with key allies such as the Czech Republic, Hungary and Bulgaria.

The positions of the Netherlands and Denmark will be worth watching. Both countries have adopted an agnostic position on the tax, but may soon have to take a decision.

Eurobonds

This is the big issue of the evening. German government sources have remained stalwart against any idea of Eurobonds, arguing that they are the wrong solution to the problem. High-ranking German officials say that priority should be given to fiscal convergence – shorthand for more centralised control of the European economy, perhaps through a Brussels-based finance minister.

Germany’s price for mutualising Eurozone debt, it seems, is a mutualisation of prior political decisions about finance. But would France be prepared to pay that price?

Even if it was, how would Germany’s fellow opponents of Eurobonds react? Would Finland surrender decision-making powers to enable the introduction of Eurobonds? Even in Austria, which supports germany, there is internal wrangling between the socialist Chancellor, Werner Faymann, and his centre-right finance minister, the outspoken Maria Fekter. He favours Eurobonds, she does not.

Greece

Greece is on the agenda of the dinner discussion, because its upcoming elections could lead to its ejection from the euro zone. The many hypothetical situations surrounding Greece’s future will haunt the summit, but are unlikely to be explicitly addressed. The UK for example believes that its euro zone colleagues will find it politically difficult to introduce Eurobonds.

London also believes that – if Greece leaves the euro zone suddenly, that such a debt instrument may need to be introduced very quickly, to prevent a 'domino effect' of contagion. Greece will thus be at the back of everyone’s minds during the discussions, even if it only merits a short statement by leaders at the end.

Positions

While Hollande had campaigned to re-open discussions on the fiscal pact, the German Chancellor Angela Merkel pointedly remarked that it was not "up for discussion". After their first meeting in Berlin, Merkel had to admit that they had had "slightly different perceptions".

Merkel has already signalled that she is open to several ideas brought forward by Hollande, such as a bigger role for the European Investment Bank and a financial transaction tax. More problematic is Hollande's support for "Eurobonds" to finance large infrastructure projects in energy, broadband or transport. The German government so far has fiercely rejected this suggestion.

Merkel's approach is to emphasise austerity in battling the deepening debt crisis in Europe. Germany insists that Europe's economies tackle their financial problems through spending cuts and Berlin has repeatedly pressured other member states to adopt a debt brake. Although Germany has a constitutional commitment to budget prudency, it has broken the EU's deficit rules in the past.

At the end of 2011, Germany and France created a fiscal union within the euro zone. At an EU summit in December, the fiscal pact emerged, requiring the budgets of participating states to be balanced, or in surplus. The pact needs to be ratified by at least 12 euro zone states to enter into force from January 2013 onwards. But after François Hollande's victory in the French presidential election, the pressure on Merkel to rethink her strategy has grown. Hollande's position of emphasising pro-growth measures received support from the US and other world leaders at the recent G8 Summit.

The Czech Republic’s coalition government of centre-right parties led by Prime Minister Petr Ne?as has emphasised “fiscal responsibility” above all else. The coalition is pushing for reforms across a range of sectors but is under fire, especially from trade unions, and there is widespread belief that it is failing to communicate its reforms to the public. Internal political problems among the coalition parties are preventing the government from proceeding with the reforms as fast as planned. “Efforts to boost the economic growth at the expense of fiscal austerity would be a step back and could endanger not only the functioning of the euro zone, but also of the whole European Union,” Ne?as said.

A new social democratic government (SMER-SD) took office only a few week ago in Slovakia. It committed to squeeze the budget deficit below 3% of GDP in 2013, mainly through higher taxes. Prime Minister Robert Fico said austerity steps worth around €250-€300 million for this year and €1.2-€1.5 billion in 2013 were needed to meet ambitious consolidation targets. Unlike the neighbouring Czech Republic, Fico supports Hollande on fiscal pact adjustments. The Slovak Prime Minister says fiscal consolidation based solely on cuts leads to higher inflation and higher unemployment. During his first official visit in Brussels he called on European leaders to agree to a growth programme.

In Hungary, under the Fidesz centre-right government of Viktor Orbán, there can be no growth without cutting budgets first. “everybody wants growth, like peace and love, says an EU source close to Orbán. “Growth versus austerity is a slogan for far left Greek parties, not the European Council,” he adds.

Background

Council President Herman Van Rompuy called this informal gathering of heads of state and government following the election of François Hollande in France on 6 May.

During his campaign, Hollande rejected the strict austerity measures being imposed by the EU, emphasising that he would push for more growth.

There are no formal decisions to be taken today but the discussion will be frank, and is designed to pave the way for decisions on growth at the next formal summit meeting, which will take place at the end of June.

 

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