Paris Insight: EU Update May the 23rd 2012

by Véronique Queffélec on mai 24, 2012


Key summary

There is not much expect from tonight’s informal EU Summit. The conclusions of the heads of State dinner are unlikely to go beyond a growth initiative which would offer only limited mitigation of the on going fiscal retrenchment.
The meeting will be the occasion to have a preliminary exchange of views on the instruments which could form a containment strategy if Greece exits, but some time is probably needed to draw the differences between the main protagonists, given in particular the political and legal situation in Germany and France.
The other most important event today may be the lunch between Hollande and Rajoy, as Spain’s banking crisis has become the second most burning issue in the current market turmoil. France may try to take the lead on this issue.

Key Analysis

1/ Growth initiative: taking shape, but no game changer
Discussing a growth initiative is the only point on the official agenda of tonight’s dinner.
The details of the Europeans’ agreement on “project bonds” released yesterday seem at this stage to be a “pilot scheme” only.
A fiscal initiative arguably more powerful would be an extension of the Excessive Deficit Procedure timeframes, allowing struggling countries more time to bring their deficits back to 3% of GDP. The flexibility of the system has been highlighted several times recently.

2/ Greece: convergence between Paris and Berlin
Greece will obviously loom large in the discussions. The Greek left is often using Hollande’s victory in France and his pledge for a better balance between growth and austerity as a vindication of their own strategy. Actually, the French government is not ready to cut Greece any leeway. In a joint press conference with his German counterpart on Monday, French Finance Minister Moscovici
Stated that the multilateral agreement must be respected, and both ministers limited themselves to offering the “growth initiative”.
France will not push its European partners in a renegotiation of the Greek fiscal adjustment plan. Greek radical left leader Tsipras visited Paris and Berlin on Monday and Tuesday. He was welcome in the two countries by representatives of the local radical left, but not so much by the French and German socialists/social-democrats.

3/ The expected French-German consensus
The international press has been highlighted a possible showdown between Hollande and Merkel on Eurobonds, but this might be overdone.
Moscovici on Monday stated France « would put the matter on the table on Wednesday » and that he found it « a strong idea ». This is to interpret as a mere rhetorical gesture supporting an electoral strategy, in the context of the French parliamentary elections (17th of June). In fact, Moscovici immediately acknowledged that “France cannot impose its views on its partners”.
Actually, Hollande himself, in his most important speech on the economy in his campaign (17th of March), explicitly stated that Eurobonds “understood as debt mutualization” were not part of his growth initiative.
In such a context, it is unlikely that the new French administration would exert strong pressure on Berlin on Eurobonds.

4/ Francois Hollande proposals: an electoral bragging

To boost economic growth, Francois Hollande strongly defends his views. He is expected shortly to submit a memorandum to his European partners to establish a recovery strategy without worsening the members’ deficit.
Actually, this document should be much less revolutionary than the candidate wanted to make people believe during his campaign. Some of his proposals are already consensus in Brussels and have been being discussed for several months now.

− European Investment Bank recapitalization

The principle is to provide additional capital to the European Investment Bank - responsible for funding infrastructure or innovation projects in Europe - to enable it to lend more without losing its precious AAA rating. The European finance ministers - all EIB shareholders - have started to discuss it last week. They should step up their work in the coming days on the basis of a capital increase of around 10 billion for the EIB, which would allow it to lend 60 billion euros. The gesture is not insignificant, it amounts to 1.6 billion to pay for Germany and France each, since these two countries are the main shareholders of the EIB.

− The “project bonds”
The “project bonds” initiative comes originally from European Commission President Jose Manuel Barroso. The Danish Presidency announced Tuesday that the EU would release a budget of €230 million euros from the EU budget to co-finance a small number of infrastructure projects in the sectors of energy, transport or communications. An initial “pilot” phase which if successful, will lead then to a larger implementation.

− The tax on financial transactions

Francois Hollande wants to tax all financial transactions, including derivatives, with an application to the entire European Union. During his campaign he advanced that the tax of 0.05% could be the basis for discussions with the European partners. But last spring, the European Commission had already proposed a directive to tax at 0.1% stocks and bonds, and derivatives at 0.01% (for a return of €50 billion). Britain rejects this directive. Finance Ministers should discuss this subject in the coming weeks.

− Structural funds restructuring

The system of EU structural funds is “no more appropriate” according to Francois Hollande. The problem behind this is that the states which must co-finance projects wishing to benefit from these funds, can no longer afford it. According to the European Commission, the financial resources available, but unused, would as a result amount to over €80 billion by the end of 2014.
During his campaign, Francois Hollande has been suggesting to “mobilize all remaining European structural funds unused” to support projects “that will have an impact on business”.