EU budget row: How much interest will the UK pay if it refuses to cough up?

300% interest - in the EU it is legal

As most of you will know by now, the European Commission has asked the UK to pay an extra £1.7bn surcharge into this year's EU budget - before December 1. David Cameron has said he won't pay anything "near that amount", which in turn has triggered an almighty stand-off with the Commission itself insisting that if the UK fails to pay, it'll be charged interest from day one.

There has been a lot of confusion as to how much interest the UK will be legally liable to pay if it follows through on David Cameron's threat to refuse to pay. The answer as always lies in an EU Regulation as we pointed out here.

So how much is it? The short answer is a lot. Let's say Cameron holds out for one month. He'll then owe the EU £3.5 million in addition to the original £1.7bn surcharge. If he holds out for six months, UK taxpayers are looking at an additional £39.1 million while one year will increase the bill to £89 million - the annual interest will then stand at 5.25% . If the debt is still outstanding after 10 years, the UK would owe an eye watering £5.5bn of interest on a £1.7bn debt - over 300% interest.

In other words, under EU rules, the penal rate is ever increasing.

This is how it is worked out. Firstly the regulation states an annual interest rate of 2% above base rates per year - making a current 2.5%. It's worth keeping in mind that this is much more than the UK pays itself to borrow (in maturities up to 12 years or so, see UK yield curve here). However there is a sting - a rising penal rate of 0.25% for each outstanding month, and the total interest is all paid at the higher rate. This quickly adds up as you can see below:

So if this drags on, it has the potential to really become messy. However, as with everything in the EU there is usually a political solution. The Netherlands and Italy are also upset at receiving demands while the calculations (particularly around the interaction with the UK rebate) and the EU amending budget that goes with it are still up for 'clarification' and/or amendment. As reports today also indicated, it seems likely the UK will be able to do a face saving deal to pay something more than zero and less than £1.7bn - but if not the implications are huge.

France and Italy get preliminary approval of their budgets, but it's not the end of the story

The European Commission has given France and Italy a preliminary nod through on their draft budgets for 2015. In a statement released yesterday evening, Commission Vice-President Jyrki Katainen said:

"After taking into account all of the further information and improvements communicated to us in recent days, I cannot immediately identify cases of 'particularly serious non-compliance' which would oblige us to consider a negative opinion at this stage in the process."

An outright rejection of the French and Italian budget plans was always unlikely, as it was in no-one's interest to trigger an almighty row involving the second and third largest Eurozone economies. However, doing nothing was also never really an option for the Commission. Had it let France and Italy get away with draft budgets that were not only clearly deviating from their deficit reduction commitments but also not even acting to try and meet them, the credibility of EU fiscal rules - already wafer-thin - would have been shattered.

Over the past few days, both France and Italy pledged to make additional cuts to those initially planned for next year. Therefore, at least in terms of political narrative, the Commission got the upper hand in this first round. It stood up for budget consolidation, and it made its demand for extra efforts heard in Paris and Rome. On the other hand, for all their anti-austerity bluster, French President François Hollande and Italian Prime Minister Matteo Renzi are likely to come across as eventually bending to the will of Brussels.

That said, this is by no means the end of the story. The measures proposed by France and Italy to achieve the extra deficit reductions look far from structural. Also, as the FT notes, the changes are still short of what the Commission demanded and remain vaguely defined: 

• In his letter to Katainen, French Finance Minister Michel Sapin mentions the lower interest rates on French debt, the lower contribution to the EU budget recently announced by the Commission (we have written extensively on this issue, see here and here), and a strengthening of the fight against tax evasion.

• Similarly, his Italian counterpart Pier Carlo Padoan said he would use a €3.3 billion tesoretto (literally 'little treasure', but basically a reserve fund), originally set aside to lower the tax burden in 2015, to reduce deficit instead. However, there seems to be no guarantee that Italy will be able to find the same amount of money every year.

The Commission will issue its final verdict on the draft 2015 budgets of all Eurozone countries by the end of November. We would expect the Commission to come up with a set of stringent recommendations for France and Italy, although an entirely negative opinion looks unlikely. In the end, we may well see a replay of the current discussion. In the meantime, as the contrasting headlines from the New York Times today show, some may struggle to discern who exactly capitulated... 

The print version and online version of the New York Times today struggle to judge who blinked first...

EU budget surcharge: how much support does the UK have around Europe?

David Cameron has taken a very tough position on the EU budget surcharge, claiming that he "won't pay" the £1.7bn the Commission has demanded from the UK by December 1 after concluding the UK had been underpaying into the budget relative to the size of its economy. Other countries have also been hit - so how much support does Cameron have around Europe?

These changes which again are due to recalibration in the way the size of economies are calculated (more on this later) are being tagged on to the annual "adjustment" to the EU budget, which is basically normal procedure.

However, this also means that EU leaders will have to agree to an "amending budget" via a decision taken by Qualified Majority Voting. This also means that the UK might have some chance of "blocking" the change if it can get other allies on board.

Below is the voting balance, if all "net losers" are clubbed together under QMV. 

EU member states' voting weights: 93 votes needed for a blocking minority

However, not all the other member states affected have been as firm as Cameron. The Dutch have appeared to soften their stance with Dutch Finance Minister Jeroen Dijsselbloem stating on Dutch TV yesterday that the Netherlands would pay its €642m surcharge "if the facts and figures are correct". Irish Taoiseach Enda Kenny said his Government will pay the additional bill, adding that “we have always abided by the rules”, while Maltese Prime Minister Joseph Muscat claimed that:

“Malta is not surprised that the EU has asked for this top-up… but we are still seeking clarifications on how the [Commission] calculated this figure”. 

Italian Europe Minister Sandro Gozi said that:

“An in-depth examination is needed… we will see whether it will be really necessary to apply the new method to calculate [national] contributions. In any case, this doesn’t imply an immediate payment.”

So hardly an endorsement of the UK's tough position, but there may be enough support for a delay or some alternative arrangement such as paying the surcharges in installments. Meanwhile, Cameron did at least get some support from an unexpected source... France (which has received a €1bn rebate). The Telegraph cites former French Europe Minister Pierre Lellouche as saying that:

"I think it's ludicrous to actually go and punish the one country that has suffered the reform. The results are showing up now - the unemployment rate has gone down to half what it is in France. The growth rate is four times what it is in France - and we go and punish the British? It's madness". 

Sadly for Cameron, Lellouche won't have a vote.

ECB preview - Dovish Draghi to double down on easing?

The European Central Bank (ECB) holds its monthly meeting in Frankfurt today - the day after ECB President Mario Draghi's 67th birthday.

As usual, Open Europe's Head of Economic Research Raoul Ruparel has published a preview on his Forbes blog, explaining what we may expect from today's meeting.

Here goes:

Following ECB President Mario Draghi’s dovish speech at Jackson Hole last month this week’s ECB meeting has taken on new importance. This has been further enhanced by the recent Eurozone inflation data which put annual CPI at 0.3% in August. The headline figure hides some of the story with core inflation actually rising to 0.9% (from 0.8%) but the ECB’s previous inflation forecasts have begun to look increasingly out of line with reality.

However, those expecting a big move are likely to be a bit disappointed. As I pointed out last month, it is almost nonsensical for Draghi to unveil new measures before his previous policies have been implemented. I am thinking specifically of the TLTROs (targeted long term lending operations) the first of which will only be conducted on 18 September. Any big announcement now could undermine the predicted take up of these measures – which clearly remain the ECB’s preferred approach for injecting further liquidity.

That being said, these measures are unlikely to make much difference since the conditions for passing liquidity on to the real economy remain very loose. They are also very unlikely to appease investors and markets which have now come to expect some significant new easing. The two key options which are on the table for this meeting are:

1. A further interest rate cut: Many will validly ask, what is the point in a further cut now? Of course it would have little to no economic impact, however, it would once again signal the dovish bias of the ECB. It would also signal a clear shift in the ECB’s position given that Draghi has previously said rates are unlikely to get any lower than current levels. It becomes another mechanism to express his commitment to further easing. There also remains scope to make the negative deposit rate more negative, although there is a cap on this since, at some point, it will be cheaper for banks to simply hold cash than deposits with the ECB.
    
2. Purchases of private sector assets – specifically Asset Backed Securities (ABS): The ECB has long telegraphed such action and it is the next obvious tool at its disposal. Whether or not it will be announced this month or in the coming months is a bit of a toss-up. It seems the ECB is not quite ready to implement it yet and has made a big song and dance about the need to adjust regulations and definitions of ABS, which are yet to fully take place. Whenever it is announced, implementation is likely to be later this year to allow the negative deposit rate and TLTROs to have time to work. I remain sceptical on the effectiveness of this policy, which I have analysed in detail on the Open Europe blog. Ultimately, the market for the transparent ABS related to SME loans remains very small in Europe and focused in the core countries rather than the periphery (where this money really needs to flow to). For example, in Q1 2014, of the €18.5bn in ABS issued, only €1.6bn used SME loans as collateral. The ECB maintains that it can and will help create the market in this area, yet with this measure having been forecast for some time, you would expect there to have been some market response already.

As with many of Draghi’s press conferences, all of this will be weaved into a dovish speech including a few key trigger words for markets – few other central bankers are as adept in their communication. As for full blow Quantitative Easing on sovereign debt, this remains someway off in my mind and hurdles remain high. Its use will ultimately be tied into developments in the fiscal and political sphere, as hinted at in Draghi’s speech (more detail on this coming in a future post). The ECB will be loath to unveil QE, which it fears can only buy time, without further commitment to reforms, a clearer fiscal approach and developments on the structure of the Eurozone which such changes will entail.

Tusk and Mogherini: Europe's new 'dream team'? Our initial thoughts

Europe's new 'dream team'?

As we noted in our previous post, Cypriot President Nicos Anastasiades had sort of spoiled the surprise. Anyway, now it's official: Polish Prime Minister Donald Tusk has been appointed new European Council President, and Italian Foreign Minister Federica Mogherini will succeed Baroness Ashton as the EU's foreign policy chief (aka High Representative for Foreign Affairs).

A couple of initial thoughts:
  
Donald Tusk 

Tusk has economically liberal and pro-free trade instincts. Most importantly from the UK's point of view, he comes from outside the euro area - and will therefore be sensitive to the concerns of non-euro countries when it comes to safeguarding the integrity of the single market, a point he made during his press conference:

#Tusk We've need to prevent Europe from dividing into euro/non-euro camps, I wouldn't have taken job if it involved new institutional split
— Pawel Swidlicki (@pswidlicki) August 30, 2014

Tusk also explicitly committed himself to ensuring the UK stays in the EU and endorsing (some) EU reforms:

#Tusk: We'll need solutions to the concerns of Great Britain, no one sensible can envisage the "black scenario" of an EU without Britain
— Pawel Swidlicki (@pswidlicki) August 30, 2014

That said, Tusk is also likely to oppose fundamental changes to EU rules on free movement; although he did say that so-called 'welfare abuse' can be addressed, as we've noted, for many the debate has moved on from the issue of 'fairness' to that of 'volume', something Cameron will be under huge pressure to place at the centre of his potential renegotiation. In the more immediate future, Cameron's early support for Tusk as new European Council President could increase the UK's chances of securing a big portfolio in the new European Commission.

Significantly, it has been confirmed that Tusk will also chair the summits of eurozone leaders - despite coming from a non-euro country. This looks like a big concession made, in particular, by French President François Hollande - who was reportedly sceptical of such an arrangement. Perhaps Hollande hopes that giving ground on this point can help him secure the key post of European Commissioner for Economic and Monetary Affairs for his former Finance Minister Pierre Moscovici.

Federica Mogherini

The resistance to Mogherini, put up by Eastern EU member states over the past few weeks, has clearly been appeased by Tusk's appointment as new European Council President. It was noteworthy that Herman Van Rompuy stressed that Tusk and Mogherini would "work closely together to secure Europe's interests and values".  

Italian Prime Minister Matteo Renzi, who has invested a great deal of political capital on Mogherini, seems to have achieved what he was looking for: a diplomatic victory in Brussels to sell to the electorate once back in Italy - where the big reforms are not going forward as fast as announcements, and the economic situation shows no signs of improvement. With the country in recession and deflation, it remains to be seen how much Italian voters will be impressed.

#Mogherini lands High Rep job, #Renzi scores EU victory to sell back at home. Not sure how much Italians will be impressed. #EUCO #EUtopjobs
— Vincenzo Scarpetta (@LondonerVince) August 30, 2014

As we noted in our recent flash analysis, the role of High Representative is less crucial from the UK's point of view - as foreign policy remains primarily a national competence, with every EU member state having a veto. However, in light of the various geopolitical challenges facing the EU (and its neighbourhood), it is possible that Mogherini will play a greater - or at least more visible - role than her predecessor.

Italy slips again into recession: time for Renzi to re-focus his reform plans?

When Matteo Renzi was widely tipped to take over as Italian Prime Minister back in February, we wrote on this blog: 

Renzi may be able to muster wider parliamentary support than [his predecessor Enrico] Letta, but he would still be stuck with a diverse coalition with smaller centrist and centre-right parties – meaning that the difficulties in pushing ahead any significant political and/or economic reform would not evaporate.

A few months later, it is fair to say the prediction was broadly correct. In his first keynote speech in the Italian parliament, Renzi pledged to implement one big reform per month. However, not much has been achieved so far:

• Some of the promised reforms have been passed only in part (such as the reform of the labour market);
• Others have been proposed by the government but are still awaiting parliamentary approval (such as the reform of the electoral law);
• Others have been announced but have yet to be turned into an official legislative proposal (such as the reform of the judiciary).

To be fair to Renzi, his reform plans involve changes Italy has failed to make for decades. However, there is little doubt the pressure is slowly mounting on the ambitious Italian Prime Minister - especially in light of the latest daunting economic data. Italy has entered recession again. Its GDP contracted by 0.2% in the second quarter of 2014 - worse than expected. The country's national statistics office ISTAT now expects Italian GDP to shrink by 0.3% this year, unless the trend is reversed. This is nowhere near the 0.8% GDP growth initially predicted by Renzi's government. By contrast, Spain is going to upgrade its growth forecast to +1.5% and +2% for 2014 and 2015 respectively.

Needless to say, the meagre growth prospects are raising questions in Brussels, Berlin and Frankfurt over Italy's ability to keep its deficit below the 'magic' EU threshold of 3% of GDP and start reducing its mountain of public debt. Unless Renzi can show substantial progress on the reform side, he's unlikely to achieve any of the 'flexibility' on the application of EU fiscal rules that he's been demanding - along with French President François Hollande - over the past few weeks, and may find himself left with little wiggle room. This would set the scene for another political stand-off between the core and periphery of the eurozone - a scenario which few emerge from looking good.

Perhaps more worryingly, Renzi seems to be currently focusing too much of his reform efforts on the political-institutional side. The reform of the Italian Senate - which has recently taken the centre stage in Rome - is of great symbolic importance and will help speed up the decision-making process once (and if) passed. But its economic impact is limited, and it involves changing the Constitution, meaning that it may not be finalised until early 2015 and will then also be put to a referendum - whose outcome cannot be taken for granted at this stage. Italy can only benefit from the removal of the institutional blockages stemming from a system where the two chambers of parliament have equal powers. However, Italy's economic situation means Renzi should consider investing his best energy and political capital elsewhere - not least because economic reform is the key area where his EU counterparts wish to see progress.

On the economic front, the main achievement of Renzi's government to date is probably a tax cut worth €80 a month for employees earning less than €25,000 a year. The measure may have played a part in Renzi's Democratic Party winning an outstanding 40.8% of votes at the European Parliament elections in May - but the jury is still out as regards its effectiveness as a means to boost domestic demand.

Furthermore, uncertainty remains over Italy's plans to cut public spending and use the savings to finance tax cuts for workers and businesses. Carlo Cottarelli, the Italian government's special commissioner for public spending reform, has recently warned on his blog that the resources he's expected to raise via spending cuts next year are already being used to fund new spending projects. In practice, this means less money to cut the tax burden on Italian businesses and workers - which is among the highest in the world and has been identified as a key pillar of economic reform.

Predictably, Renzi was off to a strong start in terms of trust from both Italian voters and Italy's European partners. However, the time may have come for him to re-focus his priorities and push harder on economic reform. A more efficient parliamentary system and electoral law, while very necessary, will do little to help him win any meaningful concessions in Europe. A thriving economy that grows at an acceptable pace will.

Will EU foreign ministers agree on what to do with Russia?

(l-r) The foreign ministers of Italy, Spain and France

EU foreign ministers will meet tomorrow to discuss what to do with Russia in light of last week's MH17 plane crash, where almost 300 people lost their lives. The option of moving to tougher 'Stage 3' economic sanctions will be on the table. While the UK, France and Germany have all warned Moscow that it will face further sanctions if it fails to secure the crash site and guarantee a thorough and independent investigation, all eyes are on Italy and Spain - usually among the most dovish member states when it comes to EU-Russia relations.

After a couple of cautious statements over the weekend, a spokesman for the Italian Foreign Ministry is today quoted as saying,

"If Russia doesn't cooperate with the investigation [into the crash], we are very much ready to support the sanctions."

Belated compared to other big EU countries, but this is the most strongly worded statement coming from Rome to date. One could expect Italy to take a tougher stance this time around, not least because the main objection raised by Eastern European member states to the appointment of Italian Foreign Minister Federica Mogherini as the new EU foreign policy chief is precisely the fact that Italy is regarded as too soft on Russia.

Meanwhile, speaking to the press this morning, Spanish Foreign Minister José Manuel García-Margallo took a milder position. He refused to condemn Russia for the crash, and suggested waiting for the outcome of the investigation by the International Civil Aviation Organisation (ICAO) before considering any further steps.

On top of this, despite presenting a united front, Germany, France and the UK might not yet be on exactly the same page - not least because France continues to look unwilling to put its sale of Mistral ships to Russia on the table, and Germany's prime concern seems to be to preserve cohesion within the EU, rather than driving tougher sanctions. The big EU member states are therefore still not all on the same wavelength - although the fact that Italy might be hardening its stance is an interesting development.

Once again then, it is far from granted that EU foreign ministers will be able to agree on tougher sanctions on Russia tomorrow. However, it is looking the most likely it has been for some time.

EU leaders fail to agree on the remaining top jobs. Anything to remember from yesterday's summit?

Yesterday's European Council summit ended without an agreement on the remaining EU top jobs. However, something interesting still came out of the meeting.

A socialist (and a woman?) for next EU foreign policy chief

EU leaders appear to have established that the next High Representative for EU foreign policy will be a centre-left politician. German Chancellor Angela Merkel, French President François Hollande and Italian Prime Minister Matteo Renzi all said it in the respective post-summit statements.

Renzi, who is pushing for Italian Foreign Minister Federica Mogherini to get the job, also stressed that, "Everyone agrees that there's no other candidacy than Italy's." Hollande added that the High Representative "will necessarily be a woman, taking into account the image of Europe we have to offer". The French President also made clear that he backs Mogherini's candidacy.

The next European Council President will be appointed by unanimity, and could be one of the 28 sitting EU leaders

As Hollande put it during his press conference, the next European Council President "will be a personality that will have to gather consensus". Similarly, Merkel said, "We need a personality...who can hold us 28 together."

Interestingly, Renzi told Italian journalists:

"Hollande said that, according to him, the next European Council President has to be one of the 28 [sitting EU leaders]. It doesn't matter whether [he/she is] from the eurozone or not. He got broad support [for this idea]."

Speaking after the summit, Polish Prime Minister Donald Tusk confirmed that his name has been informally floated for the post of European Council President (an option we discussed here and here), but that he had not been approached officially.

Tusk reiterated that he would prefer to remain in Poland, but then added:

"We have to play out a complicated game and sometimes in this game the argument goes that all options remain on the table. Therefore, if you ask me if this is impossible, I will say that in the negotiations I prefer to keep every eventuality in reserve in order to achieve the maximum that Poland could possibly achieve."

And that was it. EU leaders will meet again on 30 August to try and wrap up a deal. We will be monitoring the meeting very closely, despite it being on a Saturday.

Are things heading towards a showdown on the new EU foreign policy chief?

UPDATE (18:20) - The FT's Peter Spiegel and Alex Barker are reporting that Belgium's Karel De Gucht, currently serving as EU Trade Commissioner, could be a late entry into the race for High Representative.

Like former Estonian Prime Minister Andrus Ansip (see below), De Gucht is a member of the liberal ALDE family - that has joined the 'grand coalition' supporting Juncker in the European Parliament and now looks to be asking for something in return.

ORIGINAL BLOG POST (17:07)

EU leaders will meet in Brussels tomorrow to get on with the assignment of the remaining top jobs. Priority will probably be given to the appointment of the EU's new foreign policy chief (aka High Representative for Foreign Affairs and Security Policy).

Italian Foreign Minister Federica Mogherini is still regarded as the frontrunner for the job. However, things may not go as smoothly as initially thought. Sources close to European Commission President-elect Jean-Claude Juncker have told Italian news agency ANSA that "ten-eleven [EU] countries" are currently against Mogherini's appointment.

The sources didn't name any names, but it is understood that Eastern EU member states are particularly reluctant, since they believe Italy did not take a hard enough stance against Russia during the Ukraine crisis.

The Lisbon Treaty establishes that, similarly to the European Commission President, the High Representative is appointed by EU leaders under qualified majority. And Italian Europe Minister Sandro Gozi has made clear Italy is prepared to go to a vote. He said:

"[The appointment of] Juncker is part of an agreement whereby the High Representative goes to the socialists." 

"Juncker has been designated by [qualified] majority. No-one ever raised objections [against Mogherini] with us. If there were any, that would mean the High Representative will also be designated by majority."

Therefore, things may be heading towards another showdown. This time, though, the outcome of the vote could be a lot more uncertain. A group of ten or eleven countries (very likely to include Poland, a qualified majority heavyweight) would have good chances of success in forming a 'blocking minority' to reject Mogherini's appointment. That would be a blow for Italian Prime Minister Matteo Renzi, who seems to be investing a good deal of political capital trying to secure a post that he considers as of great prestige. But it could also shift the balance in the distribution of the other top jobs - notably the Presidency of the European Council.

Mogherini is from a centre-left party. This means her appointment would make it less likely for Danish Prime Minister Helle Thorning-Schmidt, another centre-left politician, to succeed to Herman Van Rompuy as European Council President. However, this argument could no longer be valid if the new High Representative were to come from a centre-right party.

This would be the case with Bulgaria's Kristalina Georgieva, who looks to be gaining momentum as an alternative to Mogherini, although, as our dove-hawk axis showed, Bulgaria has so far also been quite soft on Russia.

Another option could be to offer the post of European Council President to someone from an Eastern European country in order to assuage opposition to Mogherini. Polish Prime Minister Donald Tusk could be an option, although with Polish domestic politics in a precarious state he may prefer to stay put. In that case, former Estonian Prime Minister Andrus Ansip - who has already been nominated as Estonia's next EU Commissioner - could be one to watch. Ansip's Estonian Reform Party belongs to the liberal ALDE group, that has joined the 'grand coalition' supporting Juncker in the European Parliament and would presumably be keen to get something substantial in return.  

In other words, a few surprises may come out of tomorrow's European Council. Stay tuned.

Why Cameron needs to make a swift decision on the UK's next EU Commissioner

In a recent briefing, we stressed that David Cameron needs to pick a 'heavy-hitter' as UK's next European Commissioner if he wants to secure a key portfolio for the UK. Our point is reinforced by a quick look at the candidates being (more or less officially) lined up by other EU member states.

If the UK drags its feet on 'declaring' its candidate, and then sends someone not considered up for the job, we suspect its chances will pretty much have evaporated.

FRANCE - Former Finance Minister Pierre Moscovici is regarded as the frontrunner. The possible alternative could be Élisabeth Guigou, who has served as French Europe Minister, Justice Minister and Employment Minister.

GERMANY - Günther Oettinger looks very likely to stay on as German Commissioner. A former Minister-President of Baden-Württemberg, he has gained influence within Angela Merkel's CDU party during his five years as EU Energy Commissioner.
 
ITALY - Foreign Minister Federica Mogherini is widely tipped to become the new Italian Commissioner. She is currently regarded as the frontrunner to replace Lady Ashton as EU foreign policy chief. 

FINLAND - Former Prime Minister Jyrki Katainen will be the new Finnish Commissioner. He has already replaced Olli Rehn, who had to take up his seat in the European Parliament. Importantly, Katainen stepped down as Finnish Prime Minister precisely because he had set his eyes on a job in Brussels.

SPAIN - Former Agriculture Minister Miguel Arias Cañete is the favourite to become the new Spanish Commissioner. He resigned in April after being picked by Spanish Prime Minister Mariano Rajoy as Partido Popular's top candidate in the European Parliament elections.

POLAND - Various names have been suggested. Foreign Minister Radosław Sikorski remains the frontrunner (despite the recent wiretapping scandal). Former Finance Minister Jacek Rostowski and former EU Budget Commissioner Janusz Lewandowski - recently elected as an MEP - are also in the race.

NETHERLANDS - The frontrunner is Finance Minister and Eurogroup Chairman Jeroen Dijsselbloem, who is one of the two big contenders for the key post of Economic and Monetary Affairs Commissioner along with France's Pierre Moscovici.

ESTONIA - Former Prime Minister Andrus Ansip, leader of the liberal Estonian Reform Party, will be the new Estonian Commissioner, according to what Jean-Claude Juncker just said during his hearing with MEPs from the ALDE group.

What is somewhat different with this lot is that it includes a range of acting or former senior ministers still very much operating on the political centre stage in their respective countries. With some exceptions, the time when countries sent to Brussels whoever the sitting government tried to 'get rid of' seems pretty much over.

Cameron better get a move on.

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.

Renzi highlights Europe's 'UK problem'...or UK's 'Europe problem'

Speaking in the European Parliament, Italian Prime Minister Matteo Renzi has just outlined the priorities of Italy's rotating EU Presidency. It is no secret that Renzi would like to see a 'United States of Europe' - and today he made much of the need for Europe to "find its soul".

A couple of points from Renzi's speech could be interesting from David Cameron's perspective. He said:

"Europe without the UK would not just be less rich. It would be less Europe, less itself."

"We will do everything [...] to affirm that these values of investing on a different Europe need to be brought together to unity."

"Different ideas are a positive thing that make us proud, [they do] not irritate us."

On top of this short bit specifically devoted to the UK's situation, Renzi also spoke of the need to achieve a "smart Europe" and of the importance of making EU institutions "simple". He also stressed how badly the EU needs to boost its economic competitiveness, because "the rest of the world is [currently] running twice as fast as Europe." 

The challenge here, for Cameron as much as the Italian Prime Minister, is to reconcile Renzi's vision of a 'United States of Europe' with his professed desire to keep the UK in the EU. His predecessor, Enrico Letta, spoke about EU treaty changes designed to settle UK concerns.

It is progress, of sorts, that EU leaders are able to identify the issue. However, now there needs to be progress on finding solutions that work for everyone.

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.

Post-Juncker press conference round-up

We have been following the post-summit press conferences of EU leaders. Here is a round-up of the highlights, starting with German Chancellor Angela Merkel:

MOST IMPORTANT POINTS FROM #MERKEL #EUCO PRESSER: (1/3) "Ever closer union" does not mean one-speed Europe.
— Open Europe (@OpenEurope) June 27, 2014

MOST IMPORTANT POINTS FROM #MERKEL #EUCO PRESSER: (2/3) #spitzenkandidaten process will have to be discussed in #Council.
— Open Europe (@OpenEurope) June 27, 2014

MOST IMPORTANT POINTS FROM #MERKEL #EUCO PRESSER: (3/3) "flexibility" on fiscal pact does not mean member states get to re-write the rules.
— Open Europe (@OpenEurope) June 27, 2014

In his press conference, David Cameron took his defeat on the chin but noted that it would make his reform strategy harder:

“Today’s outcome is not the one I wanted. And it makes it harder, and the stakes higher…This is going to be a long, tough fight and sometimes you have to be ready to lose a battle to win a war. It has only stiffened my resolve to fight for reform in the EU, because it is crying out for it.”

Cameron was asked whether much more of this kind of thing would prompt him to recommend an ‘Out’ vote in a referendum. He declined the offer but did make the point that:

“And at the end of 2017, it will not be me, it will not be the House of Commons, it won’t be Brussels who decide about Britain’s future in the European Union. It will be the British people. It will be their choice, and their choice alone.”

He also pointed to the paragraph in the Council conclusions dedicated to the UK:

1. The UK raised some concerns related to the future development of the EU. These concerns will need to be addressed.  

In this context, the European Council noted that the concept of ever closer union allows for different paths of integration for different countries, allowing those that want to deepen integration to move ahead, while respecting the wish of those who do not want to deepen any further.  

Once the new European Commission is effectively in place, the European Council will consider the process for the appointment of the President of the European Commission for the future, respecting the European Treaties.

Italian Prime Minister Matteo Renzi was particularly keen to claim victory on a more 'flexible' application of EU fiscal rules. Van Rompuy’s agenda for the next European Commission is “very very very good on substance. For the first time, the focus is on growth. Insisting on growth is a turning point for Europe,” he said.

“Those countries who implement structural reforms have the right to greater flexibility, which is the most important political point for us.”

Renzi also touched on other EU top jobs, and made clear that:

“The name of [former Italian Prime Minister] Enrico Letta for European Council Presidency has never been made”

As for French President François Hollande, he tried to wrap his battle for looser EU fiscal rules into a European flag:

“I did not intervene only to defend France. When I evoke the flexibility in the margins of the Stability Pact [EU fiscal rules], I defend a conception of Europe.” 

And as regards the next European Commission, he said France wants “an organisation around big Vice-Presidencies. I will demand a Vice-Presidency for France.”

Read our take on what Cameron's defeat means for the reform agenda here.

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.  

Names are a consequence of things: Renzi outlines his own road map for the next European Commission

Nomina sunt consequentia rerum. Names are a consequence of things. Italian Prime Minister Matteo Renzi quotes Emperor Giustiniano and Dante Alighieri to open the paper he wrote together with Europe Minister Sandro Gozi, outlining Italy's priorities for the next European Commission.

The document has been published by Europa, an Italian daily close to Renzi's Democratic Party. And it's in English, so you can read it in full here.  

Here are some interesting bits:

The election to the European Parliament, the constitution of the new Commission, the designation of the new President of the European Council mark the beginning of a new political cycle. We can turn it into a fresh start for Europe. Nothing could be worse than [to] roll out with an inter-institutional wrangle over the top European jobs. This would be utterly incomprehensible to European public and irresponsible in the light of the huge challenges ahead. 

Therefore, as we already wrote on this blog, Italy is not keen to start its rotating EU Presidency with a big fight on top jobs.

On eurozone fiscal rules and structural reform, Italy's position should be clear by now: more flexibility on deficit and debt reduction to facilitate the reform process. The document says:

Fiscal consolidation is still challenging in spite of the unprecedented efforts, because of subdued growth and very low inflation...Benefits from reforms in terms of growth and jobs take time to materialise...The European economic framework should back reforms agendas in member states and strengthen incentives for reforms.

On growth and competitiveness, Renzi sounds very sympathetic to the UK's position:

The full potential of the internal market also needs to be exploited, including in the field of services and energy. We should move towards a real single market for electronic communications and on-line services. Improve the quality of EU legislation, reducing EU regulatory burden...More generally, the implications for growth should be factored-in in all legislative proposals and discussions.

The Italian Prime Minister also has a few ideas on how to reconcile voters with the EU:

We need to give a better sense that the EU institutional setup is at the service of European citizens' needs...EU institutions can already adopt some practical arrangements to improve their capacity to deliver. In this respect, the possibility of creating clusters of Commissioners, one for each European priority, should be seriously taken into consideration. 

And then on EU migration policy, another big priority for Italy:

We need to promote a more proactive role of the EU and more integrated policies in the fields where they have a clear added value. Immigration and asylum is clearly one of those fields, In one word, we need to promote an authentic Common European Migration Policy.

Therefore, the bottom line of Renzi's road map is:

The job description for the EU top jobs stems from this outline. Italy will support leaders that share our views on the future of Europe and are determined to foster the above priorities. 

As we previously noted, Italy can play a key role in the appointment of the next European Commission President - especially if EU leaders hold a vote at this week's European Council. Renzi is not against the principle of Spitzenkandidaten being chosen by the main pan-European political families, and has never given signs of having a 'personality problem' with Jean-Claude Juncker. Therefore, the key will be whether the Italian Prime Minister considers Herman Van Rompuy's vague list of priorities and Angela Merkel's very timid 'opening' on eurozone fiscal rules as a sufficient guarantee that Italy's concerns and requests will be taken into account by the next European Commission.

Renzi has now set out a pragmatic negotiating stance ahead of complex discussions. He has also produced a clear metric by which to judge his success or failure. Even if you do not agree with everything he is calling for, such clarity is welcome. 

Could France and Italy provide Merkel with an excuse to drop Juncker?

The appointment of Jean-Claude Juncker as next European Commission President is often boiled down to a stand-off between David Cameron and Angela Merkel. And it looks increasingly likely that there will be a vote on Juncker as early as at next week's summit of EU leaders. He is still the favourite to land the job.

However, Juncker's road to the Berlaymont building is unlikely to be incident-free, and a degree of unpredictability remains.

Over the past few days, France and Italy have made clear that their support for any candidate to the European Commission Presidency is tied to a substantial change in EU economic policies. French Europe Minister Harlem Désir held talks with his Italian counterpart Sandro Gozi in Paris yesterday, to refine a common strategy. Furthermore, France will host a mini-summit of the seven centre-left EU heads of state and government tomorrow, to discuss their priorities for the new European Commission.

The proposal Paris and Rome have been working on is clear: growth-enhancing investments and the cost of structural reforms should no longer count as deficit under EU rules. Merkel has so far resisted the proposal, but Vice-Chancellor Sigmar Gabriel - of the SPD - has come out in support of giving more budget leeway to countries that undertake a wide-reaching reform process.

Unlike Cameron, neither French President François Hollande nor Italian Prime Minister Matteo Renzi seem to have a personality problem with Juncker. Nor have they openly criticised the principle of Spitzenkandidaten. But there is a chance they could end up on the same side of the debate, although for different reasons.

There are many factors at play here. But if Hollande and Renzi push it too far and make it clear that the price of their support for Juncker is a weakening of the eurozone's fiscal rules, they could provide Merkel with an excuse to drop Juncker, sacrificed on the altar of German budget discipline. That would make such a decision more acceptable to the German public, surely?

Grillo joins Farage, but UKIP's group in the European Parliament is not a done deal yet

Now it's official: Italy's anti-establishment Five-Star Movement will try to form an alliance with UKIP in the new European Parliament. Beppe Grillo launched an online survey of Five-Star members and activists on his blog yesterday, and 78% of votes went for Nigel Farage's EFD group.

The survey has drawn criticism from the Italian press, but also from some Five-Star MPs, for a number of reasons:

• Only 29,584 votes were cast, a microscopic amount when compared to the almost 5.8 million votes the Five-Star Movement won in the European Parliament elections;

• The survey only offered three options: EFD (UKIP's group), ECR (the UK Conservatives' group) or non-attached. Other groups that could have been more natural allies of the Five-Star Movement, notably the Greens and the European Left of SYRIZA and Podemos, were not included;

• The three options were presented on Grillo's blog in a way that appeared to privilege Farage's group. The description of the ECR was shorter and less enthusiastic in tone. As regards the non-attached group, the blog warned that being part of it would mean "limited or no influence on the legislative activities of the European Parliament", and would therefore prevent the Five-Star Movement from pushing its political agenda in Europe. A fair point, although it can also be quite difficult to impose your views if you are sitting in a group where no-one agrees with you on certain issues.

Still, the verdict of la rete (the internet) is sacred for Grillo and the alliance with UKIP will go ahead. It will be very interesting to see how this plays out. Although they both emphasise the importance of referenda and direct democracy, the Five-Star Movement and UKIP are not exactly soulmates. Energy policy, EU farm subsidies, financial regulation, the financial transaction tax, GMOs and the EU-US free-trade deal (TTIP) are all issues on which the two parties do not see eye to eye.   

Indeed, the deal between Grillo and Farage is that their parties will sit in the same group, but will vote independently. This could help make the alliance sustainable in the longer term.

So where does this leave Farage with the formation of his group in the European Parliament? The bad news for UKIP is that they still need two national factions to wrap up the group. At the moment, parties from five EU countries are on board: UK, Italy, the Netherlands, Lithuania and the Czech Republic.

On the other hand, though, Farage is now ahead of Marine Le Pen when it comes to the number of MEPs in the respective groups. Farage has 45 MEPs on his side, Le Pen only 38 (42 if you count the Polish KNP party, whose participation has not yet been confirmed).

Will Le Pen and Farage both succeed in putting together a group? And whose will be the largest one? We will likely get the answer over the next couple of weeks.  

Renzi: Italy won't support Juncker if EU policies don't change

Swedish Prime Minister Fredrik Reinfeldt has invited Angela Merkel, David Cameron and Mark Rutte to his summer retreat in Harpsund to discuss the future of the EU and, most likely, the appointment of the next European Commission President. The two-day meeting has already been branded by the German media der anti-Juncker Gipfel (the anti-Juncker summit).

Meanwhile, at the opposite end of Europe, Italian Prime Minister Matteo Renzi has made his clearest statement to date on Jean-Claude Juncker as the next European Commission President.

He told a conference in Naples yesterday:

"The EPP wants to put forward Juncker? Fine. What is Juncker planning to do over the next five years? Someone who wants to continue with the policies of the past few years will not have our consent."

During his election campaign, Juncker has made clear he is not keen to relax budget discipline. And he has backtracked on Eurobonds, of which he used to be a warm supporter. In other words, not your ideal candidate if you're sitting in Rome (or Paris, we would add).

Even more so for someone like Renzi, who has built up a reputation as 'il rottamatore' - the 'demolition man' of the old political establishment. Now, Juncker can be described in many different ways, but 'new' is definitely not one of them.

Italy is also due to take over the rotating EU Presidency on 1 July. Therefore, Renzi may want to avoid pulling his weight behind a candidate that would not be able to gather consensus in the European Council of EU leaders.  

True, we shouldn't see yesterday's remarks as a definitive 'No' to Juncker from Renzi. The priority for the Italian Prime Minister is to make sure the next European Commission changes its tone on economic policies and grants his government some budget leeway to continue the reform process.

However, this remains a very interesting development. Remember: UK, Sweden, the Netherlands, Hungary and Italy could constitute a 'blocking minority' in the European Council...

France comes under fire in latest European Commission economic assessment

The European Commission has just released its latest round of country-specific recommendations (the Commission’s advice on how the country can boost economic growth and maintain stable public finances).

As with the broader economic state of the eurozone, the recommendations are a bit of a mixed bag. There are some positive assessments of the peripheral countries, but also warning over continuing problems with high debt levels and high unemployment.

We would argue that there is also still too much complacency on the former and not enough urgency on the latter points. Below, we've picked out some of the more interesting points for the big four countries.

FRANCE
The European Commission’s assessment of the French economy is quite damning, given the context of a supposed economic recovery. The Commission says that the “level of detail of the fiscal consolidation measures is insufficient” to ensure France meets its targets and that the economic forecasts used for 2015 are “slightly optimistic” and the planned savings are “very ambitious”.

The Commission also takes aim at areas of the economy which the Socialist government will not be too pleased with, specifically arguing that “sizeable short-term savings cannot be achieved without” curbing health and pension costs through reforms of both sectors. The report also hits out at French labour costs, warning that they reduce “firms’ profitability”, and its ranking in surveys of business environment which has “deteriorated” not least due to regulation which hampers growth of small business in France, the significant number of protected professions and the high overall tax burden.

Therefore, the European Commission calls for action on all these areas. Ultimately, the report does a decent job of highlighting the on-going flaws in the French economy and the lack of strategy displayed by the French government. While it has taken tentative steps towards reform in some areas others fly under the radar while the government does not yet seem to have fully bought into the reforms it has laid out for the coming years.

GERMANY
The recommendations for Germany feel very familiar with early comments regarding its current account surplus. Specifically the report calls on Germany to:

“Improve conditions that further support domestic demand, inter alia by reducing high taxes and social security contributions, especially for low-wage earners.”

However, there is not an extensive discussion and the report focuses on other areas which include some interesting recommendations such as “more ambitious measures to further stimulate competition in the services sector” (something we have long advocated) and “more efficient public investment in infrastructure, education and research”.

ITALY
The European Commission seems to have doubts over Italy’s latest budget forecasts labelling them "slightly optimistic.” “The achievement of the budgetary targets is not fully supported by sufficiently detailed measures, in particular as of 2015”, the Commission continues. This will certainly revive the domestic debate between Italian Prime Minister Matteo Renzi and his critics, who argue that there is not enough money to cover for the tax cuts for workers and businesses recently announced by the Italian government.

On labour market reform it notes, “Globally, the Italian labour market continues to be marked by segmentation and low participation…Therefore, the limited steps taken so far need to be extended.” Here, the recommendation is to “assess the need for additional action” by the end of the year. Another long-running issue in Italy is services liberalisation. According to the Commission, “There are still a number of bottlenecks to competition (reserved areas of activity, concession/authorisation schemes, etc.) in professional services, insurance, fuel distribution, retail and postal services” – and these need to be removed.

Interestingly, the European Commission also notes that “one of the key levers to improve the implementation performance [of Italy]…lies in enhanced coordination and a more efficient allocation of competences among the various levels of government”. This reform is already on Renzi’s radar. Still, we’re not sure how well this specific ‘suggestion’ will go down in Italy, given that it touches on a politically sensitive issue – the distribution of powers between the central government and the regions, which is laid out in the Italian constitution

SPAIN
The European Commission finds Spain’s budgetary forecasts “broadly plausible for 2014 and subject to downside risks in 2015”. However, “for 2016-2017, the GDP growth rate in the [Spanish government’s] programme seem somewhat optimistic.” Similar to Italy, the European Commission’s recommendation to Spain is to “reinforce the budgetary strategy as of 2014, in particular by fully specifying the underlying measures for the year 2015 and beyond.” 

Although the European Commission acknowledges that Spain’s labour market reforms have gone some way in ensuring greater flexibility, limiting job losses and reducing the number of dismissals challenged in court, “Segmentation remains an important challenge for the Spanish labour market, the number of contract types remain high and the gap between severance costs for fixed-term and indefinite contracts remains among the highest in the EU even after the reform.” Furthermore, “the inadequate labour-market relevance of education and training and the high proportion of unemployed without formal qualifications contribute to the high youth unemployment rate, as well as to long term unemployment.” Therefore, the European Commission recommends that the Spanish government “enhance the effectiveness and targeting of active labour market policies, including hiring subsidies” and “reinforce the coordination between labour market and education and training policies.”

Some variance from country to county but a couple of clear themes can be found here. Much more work needs to be done on labour market reform and improving the business climate. On top of this the forecasts continue to be optimistic. Plenty of work to be done on many fronts then.