October 02, 2014


Germany vs the sinners: the battle is on

The big story this morning – at least in the continental European press – is the looming battle between Germany on the one side, and France and Italy on the other. Both countries this week announced that they are planning to breach a whole list of European stability rules – notably the 3 per cent headline deficit rule, in the case of France, and possibly Italy as well, and the fiscal compact in the case of both.

Angela Merkel’s response came swiftly. She said the credibility of the European Union was at stake. Sustainable growth can only exist on the basis of solid fiscal policy, she is quoted by Frankfurter Allgemeine Zeitung, whose headline this morning is “Endgame for Europe”.

The French government, meanwhile, took the gloves off as well, with the statement yesterday that "no further effort will be demanded of the French, because the government - while taking the fiscal responsibility needed to put the country on the right track - rejects austerity," in the budget statement. 

The French budget plan has also been criticised from within France (see comments below) as either not enough or into the wrong direction. Also the High Council of Public Finances said the revised projections for economic growth of 1.0% next year, rising to 1.9% in 2017 still looked optimistic.

The Frankfurter Allgemeine article mocks Pier Carlo Padoan’s protestations that the downturn in Italy was the result of external factors – as opposed to the permanent delays of economic reforms. And the article notes that the Italian government’s fiscal stimulus programme did not work. It asks, rhetorically of course: what if new debts do not bring the recovery? The paper goes into quite a bit of detail of how Italy is bloating its fiscal position: for 2015, the targeted deficit goes up from 2.2% to 2.9%, which brings in some €11bn. Savings on sovereign interest rates were €5bn this year, and the government hopes for an additional €3bn in 2015. The inclusion of drug trafficking and prostitution in the GDP data increases the headroom by another €2bn. The article says Italy plans its fiscal policy irrespective of the views of the European Commission. The article is also scathing of France, which has now postponed the 3% deficit goal for the third time to 2017.

The story is also the lead in the main Italian papers this morning. La Repubblica writes:

„The French insubordination makes our position more precarious. If France is penalised, it will become more difficult to show flexibility towards us.”

The Italians see this primarily as a duel between Germany and France, unlike the Germans themselves who are even more worried about Italy. The reason behind this disconnect is that the Italians focus almost entirely on the 3% deficit criterion, rather than on the commitment to structural balance in the fiscal compact. One article in Corriere della Sera this morning looks at the power play at EU level, and notes that the PD had more seats in the European Parliament than the CDU, and that Renzi had more allies at EU level than Merkel (which is, in our view, a misjudgement).

Paul Krugman has a comment on what he talks of German “ordo-arithmetics”:

As they see it, their economy was in the doldrums at the end of the 1990s; they then cut labor costs, gaining a huge competitive advantage, and began running gigantic trade surpluses. So their recipe for global recovery is for everyone to deflate, gaining a huge competitive advantage, and begin running gigantic trade surpluses. You may think there’s some kind of arithmetic problem here, but in Germany they have their own intellectual tradition.”

Joseph Stiglitz in his column for Les Echos also reminds us that insufficient investment in Europe is due to the absence of demand not too high taxes. In this sense an austerity budget is a total disaster. The French voted for change in 2012, and all they got is a government that continues to do a supply side policy combined with austerity. 

Our other stories

In today’s briefing, we have an extensive account of the Franco-Italian-Germans discussions – if you want to call it that – about austerity; loads of comment on the French budgets and German declarations about the end of Europe as we know it; we also offers summaries of comments about the ABS programme, due to be announced today; we have coverage of a Greek confidence vote, of Spain’s optimistic budget, a credit card fraud discovered at Bankia, and an assessment of Poland’s strategy towards euro membership.

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