Fiscal policy

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

Rehn's remarks in London last month appear to be the crux of the dispute with Krugman.

Just when you thought the war of words between Nobel prize-winning economist Paul Krugman and European Commission economic chief Olli Rehn had died down, the normally level-headed Finn has hit back at the Princeton academic in an interview with his home country’s largest newspaper, Helsingin Sanomat.

In the interview, Rehn in essence accuses Krugman of lying, insisting the economist criticised him for things he never actually said. “Krugman put words in my mouth that would be termed in the Finnish parliament a ‘modified truth’,” Rehn said in the interview. The newspaper helpfully notes that “modified truth” is the Finnish parliament’s polite terminology for lying.

Rehn also takes a little dig at Krugman’s use of Monty Python to defend himself. After a deluge of attacks from European Commission officials last week, Krugman noted he never made personal attacks on Rehn – only on his policies – writing: “I never asserted that Mr Rehn’s mother was a hamster and his father smelt of elderberries.”

To the uninitiated, the line is from a famous scene in Monty Python and the Holy Grail, where a French soldier played by John Cleese taunts King Arthur, played by the late Graham Chapman, with those very words.

“We should perhaps be grateful to Mr Krugman for his generosity in promising at least not to compare my recently-deceased mother to a hamster,” Rehn deadpanned in the interview. Read more

Rehn during last month's presentation of the Commission's winter economic forecasts.

Following yesterday’s barrage from the European Commission, Princeton economist Paul Krugman today ratcheted up his criticism of the way policy is made in Brussels, arguing that the attacks demonstrate EU officials are more “focused on defending their dignity from sharp-tongued economists” than on getting economic policy right.

Krugman’s latest fusillade, titled “Of Cockroaches and Commissioners”, notes that despite the occasionally personal nature of the attacks against him from the Berlaymont, he never made a personal attack on Olli Rehn, the Commission’s economic chief:

What you would never grasp from those outraged tweets is that all my criticisms have been substantive. I never asserted that Mr. Rehn’s mother was a hamster and his father smelt of elderberries; I pointed out that he has been promising good results from austerity for years, without changing his rhetoric a bit despite ever-rising unemployment, and that his response to studies suggesting larger adverse effects from austerity than he and his colleagues had allowed for was to complain that such studies undermine confidence.

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Nobel prize-winning economist Paul Krugman, during a visit to Brussels in 2009.

Nobel prize-winning economist Paul Krugman has in recent weeks emerged as something of a bête noir for EU economic chief Olli Rehn, singling out the understated Finn as the symbol of the austerity-led eurozone crisis response that Krugman blames for exacerbating Europe’s economic recession.

Last week, after “browsing through the collected speeches of Olli Rehn”, who he declares “the face of denialism when it comes to the effects of austerity”, he criticised the European Commission vice president for arguing that budgetary tightening is the reason for the recent eurozone market calm, when Krugman believes it was more European Central Bank action.

That followed a particularly nasty attack a few days earlier at what Krugman labelled a “Rehn of Terror”, saying that Rehn’s repeated predictions that economic growth was returning was misleading – and taking Rehn to task for a letter to EU finance ministers in which he said the recent academic debate over austerity and growth “has not been helpful”. Read more

Monti casts his vote in this week's Italian parliamentary elections.

Just 48 hours after receiving a drubbing at the polls, outgoing Italian prime minister Mario Monti came to Brussels and delivered his first major address since the election, in which he issued a dire warning to other leaders attempting to reform their countries in the midst of a deepening recession: what just happened to me can happen to you.

Monti’s remarks, which appeared off the cuff, came at the end of a detailed review of Italian and EU competition policy as part of a conference Thursday hosted by Joaquin Almunia, one of Monti’s successors as EU competition commissioner.

Monti warned that because economies take a long time to grow after implementing tough austerity and economic reform measures, public opinion quickly turns against the policies and the result is “the coming up of political forces that, of course, oppose the right policies” – a not-so-veiled reference to the Five Star Movement of Italian populist Beppe Grillo, which well outpolled Monti’s coalition in this week’s vote. Read more

As we note in today’s dead-tree edition of the FT, the European Commission is out with its latest assessment of Portugal’s €78bn bailout. But buried in the report is a two-page box that raises the intriguing question of whether the bailout is actually bigger than leaders have disclosed.

In its small print, the box – soporifically titled “Euro Area and IMF Loans: Amounts, Terms and Conditions” – makes pretty clear that Portugal’s bailout will actually be closer to €82.2bn (we’ve posted the box here). Elsewhere, another table (posted here) says it’s actually €79.5bn.

Why the sudden increase? About €1.8bn of the rise is pretty straight forward. The International Monetary Fund, which is responsible for one-third of the total bailout funding, doesn’t pay its bailout aid in euros. Instead, it uses something called Special Drawing Rights, or SDRs, which have a value all of their own.

Because an SDR’s value fluctuates based on a weighted average of four currencies – the euro, the US dollar, the British pound and the Japanese yen – the 23.7bn in SDRs that was worth €26bn when the Portuguese bailout was agreed last year is now worth about €27.8bn, meaning Lisbon gets more cash just because of the currency markets.

The extra money from the EU is a little harder to explain. Read more

Berlusconi, right, hands over ceremonial bell to Monti, marking the transfer of power last year.

With Silvio Berlusconi’s vow to run again for prime minster in February’s snap elections on an avowedly anti-German and anti-austerity platform, Italian attitudes towards Berlin and the EU’s handling of the eurozone crisis are suddenly back on the front burner.

Fortuitously, we just completed one of our regular FT/Harris polls, which surveyed 1,000 adults in the EU’s five biggest countries – including Italy– in November. And it’s no wonder Berlusconi believes his new attacks will be receptive at home: Italian attitudes against Germany and austerity are hardening.

We’ve posted the 16-page report with the complete results here for anyone who wants to wade through them, but it’s worth highlighting the Italian findings. Fully 83 per cent of those polled believe Germany’s influence in the EU is “too strong” – the same total as Spaniards, but a stunning jump since October 2011 when only 53 per cent of Italians felt that way. Read more

Cyprus finance minister Vasos Shiarly, left, with EU economics chief Olli Rehn.

With the Greek government announcing the details of its highly-anticipated debt buyback programme this morning, there really is only one major agenda item offering any suspense at tonight’s meeting of eurozone finance ministers in Brussels: Cyprus.

Brussels Blog has got its hands on the draft deal between Nicosia and the “troika” of international lenders (with the words “contains sensitive information, not for further distribution” on top of each of its 29 pages) that, for the first time, lays out in minute detail just what the Cypriots are being asked to do in return for bailout cash. We’ve posted a copy here.

Senior Cypriot and eurozone officials have cautioned that the whole deal cannot be completed until Pimco, the California-based investment firm, finishes a complete review of the teetering Cypriot banking sector. But the Memorandum of Understanding pencils in €10bn to recapitalise banks.

Considering Cyprus’ entire economy is only €18bn, that’s a whopping sum, equivalent to 56% of gross domestic product – much higher than either the Irish or Spanish bank bailouts.

Which raises a problem: Cypriot sovereign debt is already at almost 90 per cent of GDP. The bank rescue, plus additional cash that will be lent to run the Cypriot government, will take that debt to levels the International Monetary Fund has, in the past, argued is unsustainableRead more

Greek finance minister Yannis Stournaras, left, and IMF chief Lagarde at Monday's meeting.

It may be incomplete and its conclusions subject to debate, but on Monday night eurozone finance ministers got a draft copy of the much anticipated troika report on Greece. As we report online, there’s not much in it we didn’t already know – including the fact Greece will need as much as €32.6bn in new financing if the programme is extended through 2016.

But the language in the report is, as usual, pretty revealing. We’ve posted a copy of the draft here. It makes clear that eurozone creditors will be leaning on Greece pretty heavily for the foreseeable future. This, in spite of the fact the Greek parliament barely passed €13.5bn in austerity measures last week amidst serial defections form its governing coalition.

The most glaring is that Athens will have to find an additional €4bn in austerity measures for 2015 and 2016, meaning the pain isn’t done yet. But it also implies there are some more shorter-term measures that haven’t been completed yet that the troika is expecting.

Greece has revamped its reform effort and fulfilled important conditions…. These steps, which have tested the strength and cohesiveness of the coalition supporting the government, leaving also some scars therein, significantly improve the overall compliance, provided some remaining outstanding issues are solved by the authorities.

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Greek finance minister Stournaras, left, and prime minister Samaras during last night's debate.

Tonight’s meeting of eurozone finance ministers was, as recently as a week ago, thought to be the final bit of heavy lifting needed to complete the overhaul of Greece’s second bailout. After all, Athens has done what it promised: it passed €13.5bn of new austerity measures on Wednesday and the 2013 budget last night.

But EU officials now acknowledge that the Brussels meeting of the so-called “eurogroup” will not make any final decisions on Greece amid continued debate over how much debt relief Athens needs – and how fast it should come. That means a long-delayed €31.3bn aid payment will be delayed yet again.

One EU official said that despite hopes, the key part of a highly-anticipated report from international monitors – known as the “troika report” because it is compiled by the European Central Bank, International Monetary Fund and European Commission – will not be ready in time for tonight’s meeting: the debt sustainability analysis, which remains a point of contention. Read more