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Challenging Merkel’s power

German Chancellor Angela Merkel with Vice-Chancellor Sigmar Gabriel

Pressure is on to increase the flexibility of the Eurozone’s stability pact’s rules

By Stelios Papadopoulos

GERMANY’S Vice Chancellor Sigmar Gabriel stated to journalists on recent a tour of an Airbus facility in France that European austerity policies have to be revisited. “The focus on pure austerity policies has failed,” he claimed. The statement is obviously a surprise and raises the question of whether Gabriel after years of backing Angela Merkel’s euro-crisis strategy is now challenging her leadership.

Merkel’s authority in Brussels has been partly due to the complete lack of powerful rivals in Germany. Gabriel, however, seems to want to change this state of affairs by seeking to present himself as a man who wants to hold Europe together. However strategists of the CDU – the centre right party currently led by Chancellor Merkel – believe that Gabriel’s comments are an effort to tarnish Merkel’s image as the ‘queen of austerity’. More importantly the dispute could become a problem for the government’s stability since this very stability depends on a strong relationship between her and her deputy.

But Gabriel’s statements also correspond with his actions. On June 21, centre-left leaders from a number of European countries – in a gathering initiated by Gabriel – agreed that there should be a more flexible interpretation of the fiscal rules of the stability pact to support growth and investment. Moreover Merkel is now facing growing opposition within the EU, as evidenced by the softening of Finland and Holland’s pro austerity stance, while Jeroen Dijsselbloem, the head of the Eurogroup, would like to see the rules of the pact relaxed.

But Merkel’s most important rival is Italian Premier Matteo Renzi. Emboldened by his strong performance in the European elections, Renzi is using his new found legitimacy to cajole fellow EU leaders into easing the clamp on spending. Renzi, whose country has the second biggest debt in Europe at more than 135 per cent of GDP, has been pushing for a more growth friendly interpretation of the fiscal rules since taking office in February, since without faster growth Rome won’t be able to pay its debts.

Consequently and given Merkel’s current isolation, it is no surprise that on June 26 she and Renzi reached a deal which stresses the need for a flexible interpretation of fiscal rules, while stopping short of any change to the stability pact. However Merkel stressed that it would be up to the European commission, not member states themselves, to decide whether extra time was needed. “The best use of flexibility means the best use, not the fullest use but the best, the most appropriate for the situation,” Merkel said.

However as the Chancellor’s statement makes clear the Germans and the Italians do not conceptualise the term ‘flexibility’ in the same way. Back in February the German and Finnish finance ministries criticised the European commission’s ‘arbitrary approach’ to budget flexibility. They stated in a memo that by attempting to discern whether a government has done enough when it comes to structural reforms – rather than focusing on actual results – the commission was implementing EU rules too subjectively. “The budgetary surveillance framework in the EU and the Euro area as laid down in the rules is clearly based on fiscal outcomes…rather than on fiscal measures,” the memo states. The Italians and the French for their part adopt a ‘looser’ interpretation of flexibility. For instance in a European Council document addressed to EU leaders an entire section on economic policy is more about investment rather than the need to watch deficits and debt as a future priority. As a Financial Times Brussels correspondent put it: The paragraph “could have been written in Rome rather than Berlin”. Furthermore there is sharp disagreement between the two sides over the meaning of the term “investment”.

Therefore Angela Merkel’s ‘concession’ to Renzi for more flexibility should be taken with a grain of salt. But what exactly is her strategy? The last time Merkel found herself in a similar situation (ie isolation) was in the June 2012 EU summit. The early part of that summit was spent on the stability pact. But just when Merkel thought the summit was over, former Italian Premier Mario Monti threatened the summit with permanent delay until two agreements were reached: The first was the direct recapitalisation and supervision of Eurozone banks. The second was direct purchase of Italian bonds from the primary market. Merkel resisted but as soon Spain and France sided with Italy she retreated.

But this was not the end of the story. The events which led to the final banking union agreements in late 2013 resulted in a common supervisor for Eurozone banks but effectively no direct recapitalisation by the European Central Bank. Judging from official statements -such as German Finance Minister Wolfgang Schauble’s call for extensive treaty changes before allowing direct recapitalisation – Germany was simply postponing the matter until other European leaders realised the futility of pursuing it any further.

These past events indicate that something similar may be going on over the flexibility of the stability pact’s rules. Merkel, in other words, may simply use the disagreement between the two sides over the meaning of the terms ‘flexibility’ and ‘investment’, to postpone any final agreement over budget flexibility in the indefinite future. But the final outcome of the North-South rift is obviously not predetermined given the actions of Gabriel and Renzi. At the moment we just have to wait for the events to unfold.

 

Stelios Papadopoulos, MSc Political Economy, is a Political Risk Analyst

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