Angela Merkel and François Hollande shadowboxed over budget deficits and fiscal stimulus in Milan today, at a European summit on tackling unemployment.
The budget clash will dramatise the struggle between two visions of how to drag Europe out of its economic morass: looser fiscal and monetary policy, favoured by France and Italy, and austere discipline, promoted by Germany.
Each leader re-emphasised their own position – but this may have been just for show, as many expect a compromise to be reached, at least on the French budget deficit.
France’s 2015 budget risks being rejected by the European Commission this month, because France will not succeed in cutting its deficit below 3% of GDP.
The summit’s host, Italian prime minister Matteo Renzi, reaffirmed Italy’s commitment to hitting budget deficit targets, saying Italy needed to cure its “reputation issue” and that Italy’s forthcoming Stability Law would limit the deficit at 2.9%.
But the French president was much less clear, saying: “France is doing what it can to meet up to its commitments.” He pointed to €21bn of spending cuts in the 2015 budget.
Keeping up the pressure
The German chancellor did not let him off the hook. In a press conference after the summit, Merkel said: “We have taken decisions in the Council – joint decisions – that we stand by the Stability and Growth Pact. France has said it would honour its commitments and I’ve seen no sign that Italy thinks otherwise. I’m confident that everybody will assume their responsibility.”
Yet she may just have been talking tough for her domestic audience. Merkel left room for manoeuvre, saying: “at the same time, we do see flexibility contained within the pact”.
A budget rejection would be embarrassing for France, but some kind of solution is expected to be found that will give it another two years until 2017 to hit the 3% target. Merkel does not want to weaken Hollande politically when his popularity is already so low.
Daniel Fermon, cross-asset strategist at Société Générale in Paris, said the risk of France’s budget being rejected was “not a key concern”, adding: “Germany understands that it cannot be alone.” What mattered, he said, was how much Hollande promised France’s trading partners in terms of reforms, to buy time on the deficit.
“If reforms come, [the budget] is not the main issue,” he argued. “If reforms don’t come, it is an issue.”
Hollande and prime minister Manuel Valls are pushing an agenda of reforms to make French labour markets more flexible. France was just at the beginning of reforms and needed to catch up, he said: “In France, civil servants make 57% of the GDP. In Germany it’s 47%. That’s too big a difference.”
Fermon had heard Valls speak in Paris today. “Valls said he was really confident in the future,” he said. “He really understands the key issue for France – which is that it’s really difficult to reform a country when your top politicians are not popular.”
Back in Milan, Hollande also gently nudged Merkel on Germany’s ability to provide fiscal stimulus, saying “some countries are able to support domestic demand”.
Merkel said Germany had taken such measures, introducing a minimum wage from January 2015 which will give workers an extra €9bn to spend, and doling out another €6bn in childcare support. No one said “peanuts” out loud, but that may have been what they were thinking.
Uproar in Italian Senate
Meanwhile, another pantomime was taking place in Rome, where senators of the Five Star Movement protested raucously as Renzi’s Democratic Party tried to push through a vote that would speed up passage of his Jobs Act, designed to liberalise Italian labour markets.
On the central purpose of the Milan summit, how to tackle youth unemployment, leaders agreed to deepen the cooperation that has already begun between employment ministers on best practice.
That youth unemployment is 7% in Germany and over 50% in Greece and Spain showed, European Commission president Herman van Rompuy said, that “national policies do matter”.
Leaders agreed to tackle inflexibilities in the way money is handed out from a €6.4bn EU fund that meant member countries had so far only been able to access €800m of it.