October 21, 2014


Here go the fiscal rules

The overwhelming experience of 15 years of fiscal rules in the eurozone is that they count for nothing if overriding political interests are at stake. Instead of solving the problem of the eurozone's descent into a secular stagnation, the European Commission and governments are transfixed on minute and economically insignificant adjustments to national budgets for the sake of keeping up appearances.

Les Echos looks into why Michel Sapin and Emmanuel Macron are so sure that the French budget won’t get a rejected by the Commission. The article lists the following arguments put forward in Paris: first, they argue that the deviation in the structural deficit is not significant enough to warrant a rejection; second France has not changed anything about its plan to save €21bn and its reforms since spring; third Paris expects that the Commission will not do anything drastic before the growth forecasts are out, expected Nov 4. They, of course, also hope that the new Juncker Commission will not want to start picking a fight with France. The French government is thus confident that it will survive the first deadline of Oct 30 without direct consequences. The Commission will give its definitive verdict Nov 30. Finally, if the Commission wants to see more efforts in the structural deficit, Sapin never closed the door to further negotiation.

Frankfurter Allgemeine reports that whether or not the Commission rejects the French budget depends on what France and Germany can agree in a bilateral deal (which if true would constitute an extraordinary derogation of power). The article quotes an EU official as saying that France will get a rejection of its budget unless they can produce a Franco-German deal that would oblige France to more structural reforms and if possible also additional savings as a counterpart for increasing German investment expenditures.

Nothing concrete about a Franco-German deal emerged from the meeting of the Franco-German finance and economics ministers yesterday. They had nice things to say about each other leaving the details of an investment plan for a meeting on December 1, Reuters reports. It was also not clear whether they had come any closer on how to deal with the French budget and reforms. Responding to the French demand to match their €50bn savings plan with investment, Sigmar Gabriel said merely that the figure fitted well with the ideas Germany was already developing to raise the share of investment in GDP from 17% to 20%, the average for the OECD. He emphasised this would be done by promoting private investment – avoiding any concession to French pressure for Germany to relax its zero 2015 fiscal deficit target, the FT reports. Wolfgang Schauble is far more sceptical than Gabriel.

In his Spiegel column Wolfgang Munchau writes that he, too, was once advocated fiscal policy co-ordination, but has since realised that this is not practical in a rules-based legal system where fiscal policy is explicitly considered the last bastion of national sovereignty. The policy process in all countries is fundamentally national. Germany wants its "black zero" - meaning balance or a slight surplus. Italy and France want to consolidate by as little as they can get away with. There is no political actor with the responsibility of optimising fiscal policy for the eurozone as a whole. With the current framework in place, the eurozone will forever have a suboptimal fiscal policy, in which everybody does precisely the wrong thing. Germany should invest, while Italy and France should save, but the opposite is happening. Munchau says the solution is not more co-ordination, but centralisation and transfer of sovereignty. And if that is not feasible, the eurozone will remain permanently dysfunctional.

Our other stories

In today's briefing we focus intensely on the question of how France and Italy are trying to get their budgets past the European Commission, even though these budgets are very obviously in breach of all sort of European fiscal rules; apart from France, we also report on Italy and Portugal; we also have stories on the start of the ECB's covered bonds programme on Rodrigo Rato's decision to quit the PP;; on the rise of Portugal's yields; on the troika's reluctance to return to Athens; on Poland's euro discussion; and on second-best policy options.

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