Juggling the needs of the EU’s leaders

The balancing act continues for Juncker as he tries to find a growth strategy that will benefit all member states.

No previous European Commission has come into office needing to push, cajole and lead the other institutions towards a strategy for saving the Union. The challenges facing the Juncker Commission are frighteningly difficult. The college of commissioners will struggle to maintain a semblance of unity in responding to the political and economic crisis which is challenging and undermining German leadership of the European Union and ultimately threatening the survival of the eurozone.

The political crisis is fed and fuelled by the appalling economic condition of the EU. Demand and investment are far too weak in most member states to shrink unemployment and defuse growing social tensions. Sunday’s general election success of the Sweden Party is merely the latest evidence that immigrants and immigration are troubling the public mind. Yet there is no real consensus on how to pull the EU out of a deflationary spiral that, among other fearful consequences, may well cripple the ability of France and Italy – accounting for nearly 40% of the eurozone’s gross domestic product (GDP) – to service their debts. These countries could lead the eurozone into a new war with the financial markets that it will struggle to survive. The Organization for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) are both urging some relaxation of the austerity policies of the last five years, a position most definitely opposed by the German government but shared by Mario Draghi as he leads his embattled European Central Bank (ECB) into an attempt to head off serious deflation.

“Flexibility” is now the code word for confronting the economic orthodoxy still holding sway in Berlin. At the moment nobody cares to define it too precisely for fear of weakening bargaining positions in negotiations that are now looming. In Paris it partly means extending for the third time the deadline by which the French fiscal deficit must be pushed below 3.0% of GDP. Michel Sapin, France’s finance minister, is pencilling in a deficit of 4.4%. In Rome it means turning a blind eye to the inexorable climb of Italian public debt towards 135% of GDP. Both countries want to preserve or increase public investment as a means of kick-starting their moribund economies. Neither could maintain or increase spending without further violation of the terms of the Stability and Growth Pact. Both are sailing perilously close to triggering so-called “corrective sanctions”, allowing the Union to impose fines that can be progressively stepped up in the absence of structural reforms to bring public finances in line with the pact’s requirements.

Herein lies one of several difficulties to overcome. Strict application of the pact requires the imposition by the EU of policy changes backed by the threat of sanctions. This heavy handedness will light domestic political fires in France and Italy that will certainly demonise the EU as the author of high unemployment and economic relegation to the lower divisions. On the European left, Germany is held almost solely responsible for austerity and caring little for the possible political consequences of rigidly sticking to its line. Think Marine Le Pen as possibly the next president of France with her violent dismissal of the EU.

Jean-Claude Juncker has generally and deservedly been awarded high marks for reorganising and restructuring the Commission around seven co-ordinating vice-presidents. It is a long overdue recognition that efficiency and policy coherence need more co-ordination and determination to break down silos. One benefit should be a lightening of the political and administrative burden on the Commission president. However, Juncker has not entirely stuck to his promise to allocate portfolios to people rather than national flags. Intriguingly Britain’s Jonathan Hill with financial services and France’s Pierre Moscovici with economic affairs have been chosen to manage issues dominating the national agenda of their respective home countries.

Both will operate under the supervisory and co-ordinating eye of their super commissioner, vice- president Jyrki Katainen whose co-ordinating responsibilities embrace a clutch of key policy areas from economic and financial affairs to the internal market. The open question is whether Katainen, Moscovici and Juncker can agree on what to do about France. Paris has been subject to the excessive deficit procedure requiring structural reforms and deficit reduction since 2009. Under Moscovici (as finance minister) and his predecessors, it has consistently failed to honour its commitments. The need to move France closer to penalties for non-compliance is compelling.

A more muscular approach is what Angela Merkel, Germany’s chancellor, wants and what François Hollande, France’s president, is anxious to avoid. Desperate for growth that cuts unemployment, Hollande and Matteo Renzi, Italy’s prime minister, want to ditch “made in Germany austerity” in favour of public investment programmes much larger than the €300 billion to which Juncker is already committed.

Juncker and Katainen will be looking for a compromise that Moscovici can sell to Paris without weakening the integrity of the stability pact, much beefed up since the financial crisis as the EU’s central defence against unsustainable public debt and deficits.

Germany’s stand guarantees the pact. If it were to soften in an attempt to satisfy Hollande and Renzi, there is a danger that the markets will doubt the commitment to sound public finances and demand much higher rates for French and Italian public debt. It is only a short step from there to another eurozone crisis and, possibly, the final showdown.