Economic governance

Renzi arrives at the EU summit in Brussels on Thursday and quickly took issue with Barroso

If you read the EU’s budget rules, it appears to be a cut and dried affair: if the European Commission has concerns that a eurozone country’s budget is in “particularly serious non-compliance” with deficit or debt limits, it has to inform the government of its concerns within one week of the budget’s submission. Such contact is the first step towards sending the budget back entirely for revision.

As the FT was the first to report this week, the Commission decided to notify five countries – Italy, France, Austria, Slovenia and Malta – that their budgets may be problematic on Wednesday. Helpfully, the Italian government posted the “strictly confidential” letter it received from the Commission’s economic chief, Jyrki Katainen, on its website today.

But at day one of the EU summit in Brussels, the letter – and Italy’s decision to post it – suddenly became the subject of a very public tit-for-tat between José Manuel Barroso, the outgoing Commission president, and Matteo Renzi, the Italian prime minster.

Barroso fired the first shot at a pre-summit news conference, expressing surprise and annoyance that Renzi’s government had decided to make the letter public. For good measure, he took a pop at the Italian press, which in recent days has been reporting that Barroso was the one pushing for a hard line against Rome, and implying he was motivated by his desire to score political points back home in Portugal, where he has long been rumoured as a potential presidential candidate after leaving the Commission:

The first thing I will say is this: If you look at the Italian press, if you look at most of what is reported about what I’ve said or what the Commission has said, most of this news is absolutely false, surreal, having nothing to do with reality. And if they coincide with reality, I think it’s by chance.

 

Having trouble following the fight over the EU’s budget rules? You’re not alone. They are fiendishly complicated, particularly since nearly every eurozone country is at risk of violating a different part of them.

Is your deficit over 3 per cent of economic output? Then you’re in the “excessive deficit procedure”. Is your deficit under 3 per cent but at risk of going over? Then you’re in the “preventative arm”. What if your deficit is under 3 per cent, but your national debt is over 60 per cent of gross domestic product? Well, you can still be in an “excessive deficit procedure” if you don’t cut the debt fast enough.

There are so many iterations that the European Commission has an entire 115-page “vade mecum” – fancy Latin for “guidebook” – for those trying to figure out how they work.

The complexity of the rules has made it particularly difficult to judge the new Italian budget, submitted – along with all other eurozone countries, save bailout countries Greece and Cyprus – to the European Commission on Wednesday. 

Latvia's Valdis Dombrovskis was heckled by some MEPs at his hearing on Monday.

After six hours of testimony over the last week between Pierre Moscovici and Valdis Dombrovskis, some MEPs are still fuming that they have no idea which one will be in charge of ruling on national budgets as part of the EU’s annual review process.

Moscovici, the former French finance minister, has been nominated economics commissioner and is seen by centre-right MEPs as too lax on fiscal matters; Dombrovskis, a former Latvian prime minister, will be vice-president for the euro and seen by the centre-left as a disciple of the EU’s austerity school of economics.

As we reported last week, going into their confirmation hearings it looked like the two men would basically share the role. But neither gave clear answers of how their division of labour would work at their hearings, leading French MEP Sylvie Goulard, the top Liberal on the economics committee, to heckle Dombrovskis: “So we don’t know?” she shouted after he failed to explain who would represent the eurozone at international fora like the IMF and G-20.

In an effort to gain clarity, the economic committee leadership on Monday sent a letter to Jean-Claude Juncker, the incoming commission president, asking for further clarification. We’ve obtained his response, and posted it here. It doesn’t provide a huge amount of additional clarity. 

Pierre Moscovici arrives in Paris for the government's confidence vote earlier this month.

One of the most highly anticipated confirmation hearings in the European Parliament this week will be that of Pierre Moscovici, the former French finance minister tapped to be the European Commission’s new economic chief, who will appear before the economic affairs committee on Thursday morning.

Members of the parliament’s centre-right grouping, the European People’s party, have vowed to give him a grilling on whether he will vigorously enforce the EU’s tough budget rules – particularly since he comes from a French Socialist government that has advocated more flexibility in the rules.

As we reported in today’s dead-tree edition of the FT, Jean-Claude Juncker, the incoming Commission president, took the unusual step of issuing a legal decision that spells out in black and white Moscovici’s relationship with the Commission’s new vice president in charge of the euro, Valdis Dombrovskis, a former Latvian prime minister with a reputation as a deficit hawk. Here’s the relevant paragraph:

 

 

We have posted the entire 6-page document here. Most of it is unsurprising boilerplate – though there is a somewhat intriguing US-style line of succession among the vice presidents on page 2, which ranks Dutchman Frans Timmermans first and Finland’s Jyrki Katainen last. 

Van Rompuy meeting with Britain's David Cameron at Downing Street on Monday

The less-watched parallel process to selecting the new head of the European Commission has been Herman Van Rompuy’s effort, backed by several member states, to come up with a work programme for the new commission president that will lock him in for the next five years when it comes to policy programmes and priorities.

Even though advocates of such an idea appear to be pushing the same policies that are mentioned in nearly every EU summit communiqué, several countries – including strange bedfellows like the Netherlands and Italy – have argued such an agenda is in some ways more important than the leader who takes over the commission in November. They insist it will enable Europe’s prime ministers to put their stamp on the next commission and its priorities after the European Parliament was seen to have dragged the current one around.

As a first step towards agreeing such a programme, Van Rompuy, the outgoing European Council president, on Monday circulated a four-page “strategic agenda” for the new commission, which he hopes to get agreed at this week’s high-stakes EU summit. We wrote about it here, but as usual for readers of Brussels Blog, we’re providing a bit more detail for those more interested, including a copy of the document, which we’ve posted here

It is safe to assume that there are parts of the UK Treasury already in a tremendous froth over this leaked opinion from the legal advisers to EU finance ministers.

Remember the only thing that would make George Osborne, the UK chancellor, hate the Financial Transaction Tax idea more than he already does would be its extension to currency exchange transactions. Even the European Commission didn’t go that far.

For that reason this opinion from the EU Council legal service will cause a stir, at least in Brussels. It contradicts the Commission’s own legal service (they are making a habit of this on the FTT) and says that there is no law in principle preventing a joint levy on foreign exchange. This effectively reopens a debate that makes London very nervous. 

Jean-Claude Trichet, right, with the parliament's economic committee chair, Sharon Bowles

The troika of bailout lenders has not been getting much love at the European Parliament’s ongoing inquiry into its activities in recent weeks. But the criticism is not just coming from MEPs in the throes of election fever. Predictions of the troika’s demise have come from some unexpected quarters, including current and former members of the European Central Bank executive board.

During the hearings, MEPs have particularly criticised the troika — made up of the International Monetary Fund, European Commission and the ECB — for its overly optimistic growth forecasts for bailout countries, which have been repeatedly revised downwards. Perhaps unsurprisingly, they have also suggested that the troika be subject to greater parliamentary oversight.

Hannes Swoboda, the Austrian social democrat who heads the centre-left caucus in the parliament, went further, saying the body is undemocratic, hostile to social rights and that the EU would be better off without it. 

Merkel mentioned the "contractual arrangements" in maiden Bundestag speech of her third term

Although the two-day EU summit that begins today in Brussels is nominally about defence policy, the main event most delegations were watching was whether summiteers would sign up to a German-backed plan that would require all eurozone countries to sign annual contracts with Brussels obligating them to liberalise their economies.

These so-called “contractual arrangements” have been bubbling around for more than a year, but fiercely resisted by Italy and other southern eurozone countries, who view it as another effort by Berlin to dictate economic policy for the rest of the currency union. Angela Merkel, in her maiden speech before the Bundestag after her re-election as German chancellor yesterday, mentioned them yet again as a necessity.

Paris has led the charge to change contracts into more of a two-way street: If eurozone countries are going to be forced to sign such agreements – which in many ways echo the “memorandums of understanding” that now are forced on bailout countries like Greece– then they should get some financial assistance in return.

Originally, Pierre Moscovici, the French finance minister, advocated a eurozone budget accessible to countries that participate and would pool responsibility for things like unemployment insurance. That idea didn’t go very far, but in the last draft of the summit communiqué sent to national delegations last night (and obtained by Brussels Blog) suggests other financial sweeteners – like loans, grants or guarantees – might be in the offing. 

Are the Dutch attempting to lead a mutiny on bank reform? It is hard to tell whether the objections are serious enough to unravel the deal last week on the EU rules for handling a bank crisis. But something mildly rebellious is certainly afoot. And it could end in another golden-gloves showdown between Jeroen Dijsselbloem, the Dutch finance minister, and his Swedish sparring partner Anders Borg.

At issue is the draft deal on the bank recovery and resolution directive (BRRD), which was agreed between negotiators for the European parliament and EU member states on Wednesday, brining to a close months of difficult talks. The reforms give all EU countries a rulebook at national level to handle a bank in trouble and, if necessary, bail-in creditors to help foot the bill.

The Dutch, however, are unimpressed. They think the draft agreement offers too much freedom to governments wanting bailout banks with public money, rather than impose losses on bondholders. And it looks like they have a significant number of allies. 

Sweden's Borg, centre, during last night's meeting, where he sparred with his Dutch counterpart

It’s become something of a routine in the EU’s ongoing effort to build a “banking union” that finance ministers try to come to a deal at their normal Brussels meetings – only to fail and call a special emergency session at the 11th hour before a crucial summit.

It happened last December when ministers held a last-minute emergency meeting to agree a new EU supervisor for all eurozone banks; it happened again in June to get to a deal on rules for how much creditors should lose when a bank fails. After yesterday’s 15-hour marathon on a new EU bank resolution authority, ministers will now have one last shot next Wednesday before the last EU summit of the year begins the next day.

The hold-up this time is a dispute over how a new EU-wide bank rescue fund should function. And if anyone is looking for evidence of how much work still needs to be done, consider these two documents which were circulated among finance ministers late last night – one here outlining an emergency backup to the fund and another here on a new treaty to set up the fund. Both are almost completely substance free, meaning a lot must be done before Wednesday.