Fiscal policy

Juncker delivers his acceptance speech Friday at the EPP's party congress in Dublin

By Vincent Boland in Dublin

It is one of the biggest events in the European political calendar. The pre-European parliament election congress of the centre-right European People’s party, which concluded Friday in Dublin, was notable for several things. But three in particular stand out.

The first is that the congress – well organised, held at the new(ish) Dublin Convention Centre, and hosted by Fine Gael, the leading party in Ireland’s coalition government – was a triumph for Enda Kenny, the Irish Taoiseach (prime minister). He managed to both look and sound statesmanlike.

Moreover, Kenny’s rebuttal of José Manuel Barroso, the European Commission president, will have done his domestic poll ratings no harm at all. Barroso, an EPP member who attended the congress, lashed out at critics of his handling of the eurozone crisis, blaming “panic in the financial markets” and too much self-imposed austerity for the pain being felt across the eurozone economy. Read more

Do last week’s German constitutional court ruling lambasting – but failing to overturn – the European Central Bank’s crisis-fighting bond-buying programme and today’s political upheaval in Italy have anything in common?

In the view of many ECB critics, particularly in Berlin, the two are not only related, but one may have caused the other. Read more

Rehn, left, with President José Manuel Barroso at Wednesday's press conference

It may have appeared that Olli Rehn, the EU’s economic chief, today was siding with Washington in the going transatlantic tussle over Germany’s current account surplus by launching an inquiry into whether the surplus was harming growth in the rest of Europe.

But Rehn went out of his way to make clear that he was no fan of the US Treasury department report that pushed the dispute into overdrive last month.

Speaking at a press conference announcing the European Commission’s decision to launch the “in-depth review” of Germany’s surplus, Rehn said the US Treasury’s report was “to my taste somewhat simplified and too straight forward”. Read more

Did tight-fisted budget policies in Germany help make the eurozone crisis deeper and more difficult for struggling bailout countries like Greece and Portugal?

That appears to be the conclusions of a study by a top European Commission economist that was published online Monday – but then quickly taken down by EU officials.

Our eagle-eyed friend and rival Nikos Chrysoloras, Brussels correspondent for the Greek daily Kathimerini, was able to download the report and note its findings before the link went dark (Nikos kindly provided Brussels Blog a copy, which we’ve posted here).

Shortly after being contacted by Brussels Blog, officials said they would republish the 28-page study, titled “Fiscal consolidation and spillovers in the Euro area periphery and core”, once a few charts were fixed. And as Brussels Blog was writing this post, it was indeed republished here.

Still, the paper’s day-long disappearance looks suspicious given the hard-hitting nature of its findings. For some, they may not be surprising. Many economists have argued that it was the simultaneous austerity undertaken by nearly all eurozone countries over the course of the crisis that pushed the bloc into a deeper recession than predicted, hitting Greece and other weak economies particularly hard.

But coming from the European Commission’s economic and financial affairs directorate – which was responsible for helping administer Greek and Portuguese bailouts as well as provide semi-mandatory policy advice to other eurozone economies – the criticism of Berlin is unexpected, to say the least. Read more

Greek prime minister Antonis Samaras, centre, holds a cabinet meeting this week.

Just how off track is Greece’s €172bn second bailout? When the FT reported that a new €3bn-€4bn financing gap had opened up in the programme, EU and International Monetary Fund officials went out of their way to insist there wasn’t a gap at all.

“There is no financial gap. The programme is fully financed for at least another year, so there is no problem, on the premise that we reach a final agreement on the review in July,” said Jeroen Dijsselbloem, the Dutch finance minister who chairs the eurogroup.

IMF spokesman Gerry Rice weighed in with a written statement: “If the review is concluded by the end of July 2013, as expected, no financing problems will arise because the program is financed till end-July 2014.”

Notice the caveats, however. Both Dijsselbleom and Rice say there won’t be a shortfall – as long as the IMF is able to distribute its next €1.8bn aid tranche before the end of July. Why? Because of the new financing gap, which means the Greek programme essentially runs out of money in July 2014. The IMF must have certainty that Greece is fully financed for 12 months or it can’t release its cash, so after July, it must suspend its payments. Read more

Prime minister Pedro Passos Coelho addresses the nation Sunday on Portugal's faltering bailout.

Although Cyprus has pushed its way back into the news, the main event at Friday’s meeting of eurozone finance ministers in Dublin is expected to be a decision on whether to give Ireland and Portugal more time to pay off their EU bailout loans.

We at Brussels Blog got our hands on the 12-page options paper prepared for the ministers by the so-called “troika” of international lenders – European Commission, European Central Bank and International Monetary Fund – and staff of the eurozone’s €440bn bailout fund, and have posted it here. The document contains five different options: extend the payment schedule a few months; by 2.5 years; 5 years; 10 years or more; or a compromise of 7 years.

As we reported earlier in the week, the debate is now centred on the document’s recommended option, the 7-year extension plan, though there are still reservations in Berlin about moving forward.

Beyond the options themselves, however, the document contains a very revealing analysis on the state of Portugal’s €78bn bailout, which has recently suffered some setbacks. As one official who will participate in Friday’s meeting put it, the topic of Portugal will be “more exciting than would have been a week ago”.

Although the document doesn’t address it directly, it makes clear that Portugal will have a very hard time avoiding a second bailout, since its financing needs in 2014 and 2015 – its first years after bailout funding runs out in July 2014 – will be substantially higher than they were during the pre-crisis period. Read more

Monti, right, and Hollande, centre, with Belgium's Elio Di Rupo during Day 1 of the summit

For all the pre-summit posturing over the eurozone’s increasingly controversial austerity-led crisis response, participants said the EU summit’s first-day session on Europe’s economy was a staid affair with almost no real debate over whether EU policy was on the wrong track.

Indeed, the summit’s communiqué, issued after the summit broke at about 10:30pm, was almost identical to early drafts circulated late last week, even though some predicted a tense discussion over its advocacy for more targeted government spending.

Instead, a different theme appeared to emerge from several leaders in the wake of the thumping taken by Mario Monti, the outgoing Italian prime minister who implemented many of the Brussels-recommended reforms, in last month’s elections: EU policies are still correct, they’re just taking longer than expected to produce results.

“The period Mario Monti was prime minister was a very brief one,” said Angela Merkel, the German chancellor, when asked of the lessons of the Italian vote. “Adopting reforms and the reforms taking effect, there’s a period of time for the benefits to be reaped.” Read more

Nicos Anastadiades, Cyprus' president, talks to reporters in Brussels ahead of the EU summit.

One of the first leaders to arrive at the pre-summit gatherings of centre-right leaders was Nicos Anastadiades. In brief remarks to reporters in English, he said he hoped a Cypriot bailout deal could be reached at a meeting of finance ministers Friday night.

“We’re doing our best to reach a fair solution and agreement,” he said. “I hope everyone is going to be fair.” Read more

Finland’s prime minister Jyrki Katainen is standing firm. As he arrived in Brussels on Thursday the 41-year-old centre-right leader made it clear Europe had to maintain the tough austerity course if it wanted to survive.

In a thinly veiled jibe at Nobel prize-winning economist Paul Krugman, who criticised the pro-austerity policies set by the European Commission’s economic chief and fellow Finn Olli Rehn, Katainen said that the debate around austerity versus growth might have academic value, but it has little value for common people.

“There are no shortcuts to creating new jobs and growth in a sustainable manner. Structural reforms might not bear fruit overnight, but are the best sustainable economic stimulus. Accumulating excessive debt is not,” said Katainen.

He added: “The future of our common currency can be guaranteed only if each member state keeps its fiscal house in order and takes the jointly agreed rules seriously.”

After the jump, you can find the Finnish leader’s full remarks: Read more

Germany's Angela Merkel at Thursday's cabinet meeting, where new budget targets were decided.

After last month’s tension-filled EU summit – an all-night affair to agree the EU’s €960bn seven-year budget – the two-day gathering beginning today is expected to pale by comparison to a considerable degree. “A bit boring is not a bad thing on this occasion,” said one senior diplomat involved in pre-summit negotiations.

Although Hungarian prime minister Victor Orbán is expected to address the international press today following his government’s controversial passage of constitutional amendments which critics claim may violate the rule of law, the only real issue that could potentially generate much heat inside the gathering is the ongoing austerity versus growth debate that has been swirling since last month’s Italian elections.

There has already been some shadow boxing on the issue between France’s François Hollande and Germany’s Angela Merkel ahead of the summit – with Hollande making the case for France to get a one-year pass on its EU deficit targets, while Merkel conspicuously announcing her own intention to get to a balanced budget a year earlier than required. Read more