Europe readies for internal battle on reform agenda

When Taoiseach Enda Kenny visits Berlin today he will be reminded how, in fashion as in politics, déjà vu keeps coming round again.

First, he opens a new store for Irish retailer Penneys – known in Europe as Primark – on Berlin’s Alexanderplatz, where herds of customers will move as fast as the fashion on offer.

Then he moves on to address the annual meeting of the economic council of Chancellor Angela Merkel's ruling Christian Democratic Union (CDU). The event will be attended by more than 2,000 leading delegates and speakers, including ECB president Mario Draghi.

Mr Kenny's address, and a bilateral meeting with Dr Merkel, are likely to focus on priorities for the new EU term as well as the agenda for the European Commission and European Parliament.

The new EU term agenda has already been seized by centre-left Italian prime minister Matteo Renzi’s demands for a more flexible implementation of EU budgetary rules. His is not a new idea but, like fast fashion, the trend keeps returning to the European agenda with increasing frequency – and with growing urgency as Mr Renzi works to put momentum behind his new government’s reform efforts.

Thanks to Mr Renzi’s lobbying, debt flexibility is the new buzzword in Brussels. At last week’s EU summit leaders agreed extra time for member states to consolidate budgets once they pressed ahead with economic reforms. They also pledged to make “best use” of the flexibility built into the union’s fiscal rule book. But, significantly, this should be done without changing any rules.

Spinning

Mr Renzi and his advisers came back from Brussels spinning the outcome as a triumph over Merkelian austerity. But Mr Renzi is not the first to make such a claim, only for it to evaporate in the post-summit realpolitik. So, will it be any different this time?

Dr Merkel has shrugged off Mr Renzi’s demands in public, insisting after last week’s summit that “the flexibility we [already] have is sufficient to secure both stability and growth”.

Her finance minister, Wolfgang Schäuble, was even more outspoken this week, telling foreign journalists that “no one is calling for a change” in the stability and growth pact. “You can’t fight a crisis by aggravating its cause, namely debt,” Mr Schäuble told the foreign press on Tuesday.

Given these utterances, how likely is a nod from Berlin – and its northern European allies – for the new European Commission to adopt a more liberal approach to debt rules?

Opinions differ on how much wriggle room politicians left themselves when they agreed the new “Six Pack” rules during the euro zone crisis as an amendment to the stability and growth pact.

Devised as a rigorous fiscal straitjacket, the Six Pack legislation nevertheless offers the possibility of a “temporary deviation ” from medium-term fiscal objectives.

Structural reforms

Attracting most attention is the paragraph in which the EU council and commission agree to “take into account the implementation of major structural reforms which have direct long-term positive budgetary effects, including by raising potential sustainable growth”.

Such measures, the legislation adds, must have a “verifiable impact on the long-term sustainability of public finances”. How to measure the “verifiable impact” is one of the key difficulties – and likely future battlegrounds.

Post-crisis, Europe’s supposedly tougher debt deadlines are as moveable a feast as ever. France has already been given an extra two years to meet its debt targets, while Spain’s target date was extended twice for a total of three years between 2010 and 2012. The Netherlands, Portugal, Slovenia and Greece were also granted extra time.

Aware of impatience among German voters at perceived foot-dragging, Dr Merkel insists the existing rules will suffice. “If I have less than 3 per cent deficit, the commission can say that co-financing from certain reform plans does not count [towards the deficit],” she said in Brussels last week.

Four countries – Italy, Slovakia, Romania and Bulgaria – have applied for added flexibility. However, only Romania and Bulgaria were given the green light, with the issue creating huge divisions along north-south lines at an Ecofin meeting of finance ministers last October.

Efforts by Mr Renzi to secure further leeway will see similar divisions at the European Council, where EU leaders meet. Here, economic traditions, political ideologies and domestic concerns will colour opinion on whether the receding euro zone debt crisis leaves greater or less room to relax the political interpretation of crisis-era budget rules.

In this debate, the European Parliament will be worth watching. The Lisbon Treaty has already given MEPs co-decision power over the vast majority of EU legislation. They pushed through the Spitzenkandidat – literally "top candidate" – system in the European elections to influence the short-list of European Commission president nominees.

Last week, the Socialists & Democrats (S&D) group pledged to support the EPP’s Jean-Claude Juncker on condition that his commission agrees “a fundamental policy shift to end the austerity-only policy ruling in Europe [and] investment in growth and jobs”.

One prominent European socialist is Sigmar Gabriel, leader of Germany’s Social Democrats – the CDU’s junior coalition partner. At a recent meeting of European Socialists in Toulouse, he backed the idea of “not adding the costs of reform to the deficit”. That prompted howls of protest from the CDU in Berlin, and a public reprimand from Dr Merkel. Mr Gabriel has rowed back, insisting he is not calling into question the stability pact rules. Senior SPD officials say the flexibility can be found beyond the rules, in how the new commission interprets flexibility.

“Mr Juncker should not be demanding countries meet deficit targets by hook or by crook,” said a senior SPD source. “When the new commission reviews debt rules in the autumn, they can interpret things this way or that.”

Dismissive

But the EPP, still the largest group in parliament, is dismissive of talk of debt flexibility.

“You need [debt] rules that apply across the board to Europe,” said EPP parliamentary head Manfred Weber, of Dr Merkel’s CSU Bavarian allies.

The CDU economic council, host of today’s Berlin event, has vowed to watch the new commission closely as it frames any flexibility in deficit rules.

‘No tricks’

“We can only warn against widening the interpretation to allow a possibility to pile up debt,” Prof Kurt Lauk, the council’s president, told

The Irish Times

. “There can be no quick tricks to reduce debt; we need solid, sustainable ways of boosting growth.”

As examples, he cites ongoing EU-US trade talks or the long-promised liberalisation of the services market in the coming EU term.

Dr Merkel’s antennae are, as always, tuned to shifts in Europe’s political air pressure. But she knows too that giving ground to Italy without binding reform commitments could be pounced on as another German sell-out by the new euro-critical Alternative für Deutschland party, which now has seven seats in the European Parliament.

In the last months, Dr Merkel and Mr Schäuble have signalled their readiness to negotiate, with talk of “growth-friendly consolidation”. For European socialists, the coming months are about filling an empty phrase with real content.