Franco-German stand-off over eurozone fiscal rules reaches biblical proportions

In the past month there has been a lot of pushing and shoving over the eurozone's fiscal rules (see here). While renegotiating the Stability and Growth Pact seems off the table, French President François Hollande and Italian Prime Minister Matteo Renzi have been calling for more 'flexibility' in the application of eurozone fiscal rules - leading a whole host of German politicians to see red.

Whether or not more flexibility may be granted to member states in the future will in part be decided by the next EU Economic and Monetary Affairs Commissioner. As we've pointed out here, the two front runners for the post for the post are French Economy Minister Pierre Moscovici and Dutch Finance Minister Jeroen Dijsselbloem.

And Merkel's CDU is not happy about the prospect of Moscovici bagging the job. The party’s budgetary spokesperson Norbert Bartle has told Handelsblatt:

“If you appoint exactly that French Finance Minister [Pierre Moscovici] to the position of the EU Economic and Monetary Affairs Commissioner, who has done nothing to comply with the Stability Pact, that is as if you wanted to cast out the demons with Beelzebub." 

Bartle could have stuck to the good old "putting the fox in charge of the hen-house", but when CDU politicians resort to the bible to argue their case (Matthew 12:27), you know it's getting serious.

Flexibility and sloppy translations: Could the discussion on EU fiscal rules still endanger Juncker's election?

The Bundesbank attacks Renzi: "He tells us what to do". This is today's front page headline of Italian daily La Repubblica. According to Italian media, Bundesbank President Jens Weidmann yesterday had a go at Italian Prime Minister Matteo Renzi for telling everyone else in Europe what they have to do.

Well, that's not quite what Weidmann said. The full speech is available here. And the exact quote is:

Italian Prime Minister Matteo Renzi, for instance, likens the EU to 'an old, boring aunt, who tells us what we should do.'

In other words, Weidmann was simply quoting Renzi. Quite different from what has been reported by Italian papers, although Weidmann did say in his speech that structural reforms "should be implemented, not only announced" - a Bundesbank Leitmotiv.

A case of 'lost in translation'. Still, Renzi hit back less than an hour ago during his joint press conference with outgoing European Commission President José Manuel Barroso in Rome:

#Renzi: The task of the Bundesbank is not to take part in the Italian political debate.
— Vincenzo Scarpetta (@LondonerVince) July 4, 2014

Sloppy translations aside, this episode highlights that there are some unresolved issues when it comes to what different eurozone countries mean by the 'flexibility' of EU fiscal rules. This may well spice up the European Parliament vote on the appointment of Jean-Claude Juncker as European Commission President, scheduled for 15 July.

A couple of Italian MEPs from Renzi's Democratic Party have said they want "clarity" from Juncker before supporting him. Similarly, the leader of French Socialist MEPs Pervenche Bérès told French daily Le Monde:

We are in a difficult equation. We criticise the [economic] policies of the right. But if we reject this candidacy, we will have no influence on the re-orientation of the policies that Juncker must pursue.

It is too early to tell how this story will end. Juncker is due to meet the centre-left S&D group on Tuesday precisely to discuss the priorities of the new European Commission. We will probably have a clearer idea after that. Indeed, one would assume that, if Renzi or François Hollande told their MEPs to vote for Juncker, MEPs would follow their leaders' instruction. Furthermore, the German and Italian governments are both playing down tensions.

That said, looking at the vote on Juncker in the European Parliament, the three groups expected to back him (EPP, S&D and ALDE) have 479 MEPs in total. The UK Labour Party already said it would vote against Juncker. If French, Italian and maybe Spanish centre-left MEPs did the same, along with the 12 Hungarian centre-right MEPs from Prime Minister Viktor Orbán's Fidesz party (who sit in the EPP group), support for Juncker would suddenly shrink to 389 MEPs.

The required majority is 376, so we would be looking at a much tighter vote. And it's going to be a secret ballot, which adds to the uncertainty. Time for Juncker to get worried? Maybe not yet, but he has already got a quite difficult job on his hands in pleasing everyone when it comes to using the 'flexibility' in the EU's Stability and Growth Pact to its full extent.

Italy claims "great victory" over "looser" eurozone fiscal rules

UPDATE (11:30am) - In a separate interview with Quotidiano Nazionale on Saturday, Mr Del Rio explicitly speaks of a "great victory" for Italy at the EU summit.

Here's the full quote:

"The green light to flexibility is the great victory [...] One needs to acknowledge that, thanks to Italy, the work of the summit was not focused on names, but on what to do to move from the time of austerity [rigore] to the true implementation of the [EU's] Stability and Growth Pact. We really won a substantial battle."

ORIGINAL BLOG POST (9:50am)

It was bound to happen.

The battle to make EU fiscal rules more 'flexible' was one of the key issues on the table at last week's European Council summit. Italian Prime Minister Matteo Renzi and French President François Hollande were seeking to make their support for Jean-Claude Juncker conditional on a de facto loosening of the rules. So what was the outcome? Well, depends on who you ask. If you ask Renzi's people, this weekend saw a watering down of the rules.

Graziano Del Rio, Renzi's top aide (see picture), claims thus in an interview with today's Corriere della Sera:

Q: Italy comes back from Brussels with the rule of the 'best use' of the flexibility already provided for [by the EU Treaties]. Isn't that too little to speak of a Europe that abandons austerity and of a victory of the Renzi government?

A: No, it's not too little because it is precisely the lack of use of flexibility that has caused our most serious problems.

Q: So, during its semester of [rotating] EU Presidency, Italy won’t ask to raise the [EU's] deficit limit, the famous 3% of GDP? 

A: I don’t think that’s a rule set in stone forever, but we don’t want to be the ones who move it onto sand. No, we won’t ask to raise the 3% [deficit/GDP threshold]. That’s also to avoid suspicions and titters in Europe, keeping in mind that there are other countries that glaringly breach that limit – and even Germany has done it during a certain period of time.

Q: Excuse me, but what does this greater flexibility mean then?

A: It means that, when deficit is calculated, part of the spending is not taken into account, or, better, it is considered as flexible. The [EU’s] Stability Pact effectively becomes looser. It can be done for co-financing, that is the money Italy is obliged to spend to use EU funds. We’re talking about a figure around €7 billion a year. But there’s also the investment clause, that would allow [us] to leave out of the calculation spending with a high social impact […] We’re talking about a figure around €3 billion. In total, flexibility could be worth €10 billion a year, although it can’t be taken for granted that these two items can be added together.

Of course, everyone is talking about 'interpretation', and no-one will say the rules have been formally re-written. Still, this looks as if the Italian government is claiming they have managed to loosen EU fiscal rules, via a new interpretation. Spin or otherwise, Berlin and Frankfurt won't be entirely pleased.

The stakes are raised: Will Renzi and Hollande back Juncker even absent more lenient eurozone fiscal rules?

As we anticipated on our blog last week, the discussion over Jean-Claude Juncker's appointment as next European Commission President has in part turned into a debate over whether the EU's fiscal rules - enshrined in the Stability and Growth Pact - should be applied in a more 'flexible' way.

France and Italy are making their support for Juncker conditional on the new European Commission granting them more budget leeway while they push ahead with structural reforms, and Germany is reluctant to make concessions.

This also matters for David Cameron's battle against Juncker, as an increasing number of Germans now see what can happen when Britain gets isolated and Berlin is left facing a Mediterranean bloc, armed with Qualified Majority Voting. It may be too late in the day for Merkel to U-turn, but it will definitely serve to focus minds in Berlin following this episode. But could Cameron hold out hope for Italy and France?

Renegotiating the Stability and Growth Pact seems off the table, and neither French President François Hollande nor Italian Prime Minister Matteo Renzi are actively calling for changes to the rules. The key is what each country means by 'flexibility'. Renzi wants to exclude a number of 'strategic' investments from EU deficit calculations. Hollande wants more time to cut France's deficit. And Merkel wants things to stay just as they are, because she thinks that the existing rules are flexible enough.

As a result, things may just be squaring up for a stand-off at this week's European Council. German Finance Minister Wolfgang Schäuble told ARD yesterday that he opposes any "re-interpretation" of EU fiscal rules, and added:

"More debt only leads to a deepening of the problems instead of solving them."

In an interview with La Repubblica, Italian Europe Minister Sandro Gozi hit back:

"It is for [EU] leaders to discuss a new course for Europe. Therefore, we are not concerned about declarations by this or that minister, even if from an important country."

Meanwhile, Hollande yesterday circulated a paper outlining France's priorities for the new European Commission. The document, seen by Le Monde, calls for "an application of [EU] budgetary rules that favours investment and growth", while taking into account "the reforms undertaken by countries and their economic situation".

However, Merkel doesn't sound prepared to back down. She told the Bundestag this morning:

"[EU fiscal rules offer] clear guard rails and limits on the one hand, and a lot of instruments allowing flexibility on the other. We must use both just as they have been used in the past."

If a vote on Juncker eventually takes place at this week's European Council, Hollande and Renzi will have to abandon their convenient 'priorities first, names later' line and make a clear choice. Then the key question will be: do they think they have been given sufficient guarantees that their requests will be taken on board by the next European Commission? If the answer is 'No', Juncker's candidacy could still be struck down.

It is going to be interesting but it'll take a major turn of events for Juncker to be dropped now.