'Poets and Alchemists' Berlin and Paris Undermine Euro Stability

Market uncertainty over the future of the euro has returned, but that hasn't stopped France from flouting European Union deficit rules. Berlin is already busy hashing out a dubious compromise.

German Chancellor Angela Merkel and French President François Hollande: The German chancellor is unlikely to seek a collision course with France over its budget deficit.

German Chancellor Angela Merkel and French President François Hollande: The German chancellor is unlikely to seek a collision course with France over its budget deficit.


Following three hours of questioning at European Parliament, a visibly exhausted Pierre Moscovici switched to German in a final effort to assuage skepticism from certain members of European Parliament. "As commisioner, I will fully respect the pact," he said.

Moscovici was French finance minister from 2012 until this April and will become European commissioner for economic and financial affairs when the new Commission takes office next month. But can he be taken at his word? There is room for doubt.

In response to the unprecedented euro-zone debt crisis, the European Union agreed to strengthen its Stability and Growth Pact in recent years. Member states gave the European Commission in Brussels greater leeway to monitor national budgets and also bestowed it with rights to levy stiffer fines for countries that violate those rules. Smaller member states have already been forced to comply. Still, as German Chancellor Angela Merkel herself has told confidants, the real test will come when a major member state is forced to submit to the EU corset.

That time is now. And the big EU member state in question is France. The development is creating a dilemma for Merkel.

Market Jitters

The issue is far greater than a few tenths of a percentage point in the French budget deficit. At stake are France's national pride and sovereignty -- and the question as to whether the lessons of the crisis can actually be applied in practice. Also at stake is the euro-zone's trustworthiness, and whether member states will once again fritter away global faith in the common currency by not abiding by their own internal rules. "The markets are watching us," says one member of the German government -- and he doesn't sound particularly confident that the world will be impressed.

The markets are indeed jittery. The German economy is growing more sluggishly than expected and is no longer strong enough to buoy the rest of the euro zone. Interest rates for Greek government bonds have suddenly surged, likely because of domestic political instability, rising close to the levels that threatened to push the country into bankruptcy in early 2010. Meanwhile, the European Central Bank has already used up a good deal of the instruments it might have used to combat a new crisis.

Graphic: Bond markets are jittery again.

Graphic: Bond markets are jittery again.

Euro fears are returning, certainly not a good time to sow additional seeds of doubt. But if experts in Brussels are right, France is doing exactly that with its 2015 draft budget, submitted last week. It suggests that the French government is on the verge of delivering even less than the already low expectations of the European Commission. One high-ranking EU diplomat scoffed at the 60-page draft budget, saying it gave the impression that it had been written mostly by "poets and alchemists." The document itself speaks of "substantial efforts since 2012" and "unprecedented fiscal consolidation measures."

Paris Wants to Increase Debt

The tone doesn't become more subdued until near the end. Instead of reducing borrowing in 2015 to the 3 percent of gross domestic product (GDP) permitted under the pact, Paris is now planning deficit spending of 4.3 percent. The country doesn't plan to bring itself back in line with Stability Pact rules until 2017. In addition, the sovereign debt ratio is to rise from 92.2 percent of GDP in 2013 to 97.2 percent next year. The numbers look markedly better in many other euro-zone countries, with deficits largely under control. That includes the majority of the crisis countries, which have subjected themselves to tight austerity and reform programs since 2010 in exchange for bailout loans.

Graphic: France continues to violate EU deficit rules.

Graphic: France continues to violate EU deficit rules.

Against that background, the draft budget from Paris struck many officials at the Brussels headquarters of the Commission's Directorate General for Economic and Financial Affairs (ECFIN) as being particularly brazen. But what can they do? And how can they command respect?

Under the provisions of the tightened rules, the European Commission has until Oct. 29 to either approve or reject the budget. Outgoing European Commissioner for Economic and Monetary Affairs Jyrki Katainen, a Finnish hardliner on budget policy, appears determined to enforce the Stability Pact rules. Although he is moving to a new post, he will still have similar responsibilities when he takes his position as vice president of the incoming European Commission.

Some smaller euro-zone countries have already felt the brunt of the new pressure coming from Brussels, including Belgium. In December 2011, the European Commission threatened to levy fines against the country if it didn't present a 2012 budget conforming to the Growth and Stability Pact's rules. "They would have had to pay an €800 to €900 million fine," Olli Rehn, the currency commissioner at the time, told EU auditors last week. To avoid the penalty, the Belgian government made cuts to unemployment benefits and raised the age for early retirement.

Are All EU Member States Equal?

But does the euro stability pact truly apply equally to all member states, or are there countries that are more equal than others? That's the "€100,000 question," one German EU diplomat says. Smaller euro-zone nations indicated at the most recent meeting of EU finance ministers that they are unwilling to accept unequal treatment. "In Luxembourg, the principle of adhering to the applicable rules applies to both large and smaller countries. Rules create the stability and security that we need," says Luxembourg Prime Minister Xavier Bettel. However, he adds, the provisions of the stability pact also allow for some flexibility.

During his visit to Berlin at the end of September, however, French Prime Minister Manuel Valls took the preventative measure of forbidding any comparisons with smaller countries. "I will not permit people to discuss France in this context," he said tersely during a reception at the French Embassy. "France is a big country." Regardless whether the EU Commission demands more reforms and tougher savings, he said, "We won't do it." Michel Sapin, his current finance minister, upped the ante last week, saying, "we won't cut more anywhere and we also won't raise taxes." He added that the €21 billion in austerity measures already undertaken by France through the end of 2015 were sufficient.

Still, even this pledge is on shaky ground. Observers at the High Council for Public Finances, a French public finance watchdog founded in 2012, are critical, arguing that some assumptions in the budget either haven't been proven or are "very unlikely." For example, in the midst of a crisis, there is nothing showing that consumption in private households will increase by 0.7 percent as the budget suggests. In addition, the High Council notes, some of the revenues calculated as part of the draft budget are likely to disappear -- such as the €0.5 billion that will go missing as a result of the French government's mid-October decision to drop plans for a levy on heavy trucks.

The European Commission, which has given no indication yet that it has been intimidated by the harsh statements coming from French officials, is likely to have similar reservations. In the coming days, the Commission is expected to call on France to make improvements to the budget. Sources in Brussels say that if Paris doesn't comply, the Commission will reject the French budget on Oct. 29, one of the last days of its current term. "Europe is at a crossroads," says Manfred Weber, the chairman of the conservative European People's Party group in European Parliament, which represents Christian Democrats from across the Continent. "The European Commission's credibility is at stake with its review of the French and also the Italian budgets. France's budget has to be rejected. President Hollande needs to make improvements."


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Inglenda2 10/20/2014
1. The EU is not the free Europe so many people died fighting for!
Moscovici former French finance minister and future European commissioner for economic and financial affairs cannot be relied on to stop the Euro-zone debt crisis. But who in Brussels can be trusted to do so? Too often have we heard that the European Union has agreed to strengthen the Euro and its Stability? Nothing has been done in that direction and the savings of millions of Europeans have been literally destroyed. The very basis for a successful common currency, (a harmony of taxes and social insurance, in all member states), has not even been earnestly discussed, let alone introduced! Under such conditions, it is no wonder that Euro sceptics are on the increase. As to German Chancellor Angela Merkel &Co., The question may be raised: Who is more dishonest, Those who try to avoid paying taxes, or those who have no conscience about helping themselves to the money which has been paid?
spon-facebook-10000139396 10/20/2014
2. classic faults
The EU has the classic fault of most un-successful federations: that of hegemony of one or two states. Add that to the lack of Fiscal Union; which must now be plain to everybody, is the primary quality necessary for any successful currency: the future of the EU does not look bright.
peskyvera 10/20/2014
There are the rich EU nations. There are the poor EU cousins. And then there is corruption all over the EU.
pbranco 10/20/2014
A true Europe has to consider the same treatment for all. None discrimination has to be aloowed.
green123 10/20/2014
5. I see IMF rules all over this...
"They would have had to pay an €800 to €900 million fine," Olli Rehn, the currency commissioner at the time, told EU auditors last week. To avoid the penalty, the Belgian government made cuts to unemployment benefits and raised the age for early retirement. " This sounds to me like the IMF's Washington Consensus that US applies to small nations. Is this where the EU is heading? a US puppet nation like Mexico...
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