October 23, 2014
La Repubblica has an insightful article this morning about how the Commission has been backing down in its fight with Matteo Renzi over his budget. The article includes a lot of details about some behind-the-scenes manoeuvrings. Jose Manuel Barroso had planned to write a tough response to Renzi over his budget draft – as a parting shot and as a Launchpad for a new political career back home, La Repubblica writes. But he faltered when he came under pressure from others, including Jean-Claude Juncker and Angela Merkel. The behind-the-scenes discussions are the reason for the delay in the letter, which has been worded much more mildly, asking for clarifications rather than expressing a negative opinion.
The article said that there various considerations behind this. Jyrki Katainen and his stuff were concerned that a tough response in the letter could have led to a destabilisation in financial markets. Herman van Rompuy also intervened because he did not want this issue to overshadow the European Council. In the end, the Commission refrained from sending an early warning, and instead opted for a letter seeking clarifications. And this followed a number of phone calls and video conferences between Katainen and Pierre-Carlo Padoan.
The article goes even further, by saying Italy may have to concede a lot less in the ensuing discussions. It was previously thought that the proposed 0.1% of structural deficit corrections were only an initial offer. The budget includes a reserve that could be used for further deficit reduction. That may not be necessary either. The big idea is now for the Commission to maintain its request of a 0.5% deficit reduction formally, but to fudge over the gap with some technical and statistical arguments to make this whole debate incomprehensible.
Les Echos, meanwhile reports that Brussels could ask France for at least €4bn in extra efforts to come closer to the 0.5% of GDP effort in reducing the structural deficit in return for accepting at least partly the explanation of the different accounting methods put forward by the French executive. Officially the Commission has until end of November to give its advice but can do so already by the end of October if the deviation is considered serious. A senior German government official confirmed that France's budget will not be on the agenda at a summit of European Union leaders this week.
The French government, meanwhile, gave more details about the €9.6bn in social security savings, but Les Echos writes that there are still question marks as to how they want to realise the savings with the basic pensions and the savings from lower indexation in complimentary pensions. They also seem to account for past measures under the 2015 banner and the re-modulation of the family allowances is more likely to bring in €400m instead of €700m in savings, so the article. And finally the government is also awaiting a new report from the senate before accounting for new measures, which is likely to delay the start of the savings measures.
The German reaction to those Franco-Italian budget struggles is still fairly mild. is currently focusing more on the ECB than on fiscal policy, so this issue has not yet hit the headlines in a big way yet. We noted, however, a comment by Hans-Werner Sinn in Project Syndicate, in which he writes that Italy and France are now in open breach of the fiscal compact. Sinn reminds his readers that the fiscal compact was the quid-pro-quo for Germany’s agreement to the ESM. He said the effective renunciation of the fiscal compact by Valls and Renzi suggests that debt ratios will rise even further in the coming years. This policy raises tough questions about the sustainability of the current fiscal framework. He said the eurozone should abandon the debt mutualisation model – ESM guarantees, ECB collateral policies that treat all sovereign debt alike – in favour of a liability model, in which investors bear the whole risk of a default. Looking at the US, Sinn notes that it, too, started off with a mutualisation model in the late 18th and early 19th century, but abandoned it later as it led to a credit bubble that collapsed in 1837. The non-compliance by France and Italy of the fiscal compact should serve as a sign that this model is not working in the eurozone, just as it did not work for the US. He says the ECB should abandon OMT for this reason. It should require that Target 2 debt be repaid with gold. And governments should reconsider the fiscal compact itself. The message should be to investors that they cannot rely on the printing press.
We also have stories on the French deficit, on the escalating fight in the French Socialist Party, on the come-back of the Barcenas case in Spain; on the precautionary credit line for Greece, on Hypo Alpe Adria in Austria, on the Irish housing boom, on Juncker’s investment programme, on the stress tests, and on an intriguing new argument for a fiscal stimulus.