European Commission takes dim view of German surplus ahead of banking talks
Europe Letter: the Irish bailout exit and progress on troubled banks is sure to exercise minds among euro zone finance chiefs
German chancellor Angela Merkel and European Commission President José Manuel Barroso attend a news conference at the end of an international summit on youth unemployment at the Élysée Palace in Paris on Tuesday. Photograph: Reuters/Philippe Wojazer
Minister for Finance Michael Noonan travels to Brussels today to meet his euro zone counterparts, ahead of tomorrow’s meeting of all 28 European finance chiefs.
With Ireland’s exit from the bailout just weeks away, Ireland will be one of the main topics under discussion, with finance ministers due to be briefed on the 12th and final EU-IMF troika visit. The strong expectation in Brussels is that Ireland will exit the bailout unaided, with EU officials stressing that this is a viable economic option. Although Minister of State at the Department of Finance Brian Hayes was questioned by European counterparts on Ireland’s intentions at an EU meeting in Brussels on Monday, a final decision is unlikely this week.
Instead, Germany has unexpectedly found itself in the limelight. It may be technically without an elected finance minister as coalition talks continue in Berlin, but the euro zone’s biggest economy is at the centre of Europe’s economic narrative. Yesterday, the European Commission announced it is to investigate Germany’s current account surplus, pointing out that the country has exceeded the 6 per cent threshold set by Brussels every year since 2007.
Germany’s widening gap between its booming export sector and its muted import levels, a
consequence of the German consumer continuing to save, is putting upward pressure on the euro, making it more difficult for the peripheral states to recover competitiveness through internal depreciation, the commission said.
Pressure on Germany has been building since last month’s report by the US treasury which warned that the German economy could be harming euro zone growth. A blog post by EU commissioner Olli Rehn earlier this week, and an astutely timed opinion piece in the Frankfurter Allgemeine, also prepared the ground.
The decision to initiate a review of the German economic model represents a remarkable shift in the euro zone story, as traditionally it has been much lauded. Brussels is sensitive to the political dimension of the move, with Rehn yesterday cautioning against an overpoliticisation of the issue, adding that concern over Germany’s trade surplus does not give a green light to other euro zone countries to ease up on fiscal reforms.
But the move is significant in light of the broader context of Germany’s current relationship with Brussels. Disagreement over the surplus – Bundesbank chairman Jens Weidmann said the knock-on effects of an easing of fiscal policy in Germany would have a limited effect on the euro zone – is one of a number of pressure points between Brussels and Berlin.
Earlier this week it emerged that two German members of the European Central Bank’s governing council led a group of six who voted against the ECB’s decision to cut interest rates last week. The divisions between northern and southern countries over the central bank’s governance are significant, particularly in light of the increased ECB role in the management of the European banking system as it assumes supervisory control of euro zone banks.
Last Friday the ECB published a legal opinion on the Single Resolution Mechanism (SRM) proposal advanced by Brussels to deal with troubled banks, a key element of banking union meeting stiff resistance from Germany. The ECB backed several commission proposals, including the suggestion that it should apply to all banks coming under the SRM. It also stressed that the mechanism can be established without treaty change, again a key German concern.
Pursuit of compromise
Banking union will be a key focus of this week’s finance ministers meeting. Leaders have pledged to reach agreement by the end of the year. ECB executive board member Joerg Asmussen indicated last week that a compromise could be possible, for example with the SRM only applying initially to the euro zone’s top 130 banks.
The prospect that a swathe of smaller banks could be excluded from a centralised resolution process may be unacceptable for many countries and for markets, which are counting on the promise of an all-encompassing banking union to lead Europe out of the crisis.
Germany is not the only country to find itself at the receiving end of the commission’s economic wrath this week. France is expected to come under fire tomorrow, when the commission publishes its update on the so-called excessive deficit procedure for euro zone countries.
The euro zone’s second largest economy was downgraded by Standard & Poor’s last Friday, while commission president José Manuel Barroso warned this week that France’s fiscal policy “has reached the limits of acceptability”.
With problems like these in the euro zone’s two largest economies, Ireland’s conundrum over the best way to return to private markets may be the least of the euro zone’s worries.