EU Fiscal: Maximum Flexibility

Published on February 4, 2016

In today’s press conference on the latest European Commission economic forecast, Economic and Finance Commissioner Pierre Moscovici, when asked about Italy and its repeated demands for more fiscal space, struck a much softer tone than the more assertive comments he made two weeks before at the Davos World Economic Forum.


In Davos, Moscovici warned Italy to make efforts to reduce its debt and to rein in fiscal spending, whereas today he declined to comment on substance, pointing to the good relationship and daily conversations he has had with Italian Finance Minister Pier Carlo Padoan, and merely said a decision on Italy’s requests will come in May.


*** These more appeasing comments should be taken in conjunction with more conciliatory remarks made yesterday by Commission President Jean-Claude Juncker as well, who, in reference to Italy’s demands for flexibility on expenses related to the migrant crisis, said the EU executive will not pursue “stupid austerity policies” when assessing Member States’ budgets. ***


*** Indeed we continue to believe, and these latest statements only reinforce our expectations, that Italy will get the maximum possible flexibility allowed by the budget rules, albeit not beyond the threshold of 0.75% of GDP set by the existing legislation (see SGH 1/26/16, “SGH Report – Italy: Renzi’s Push for Further Stimulus”). ***


The Juncker Compromise


Over the past two months, in an effort to obtain a green light from the Commission for the additional FY 2016 spending planned last October, Italian Prime Minister Matteo Renzi has engaged in a media battle with the European Commission, even going as far as to use Italy’s leverage in other areas of EU politics (migrant crisis, Russian sanctions) to force Brussels to bend.


That, in turn, prompted the Commission, unhappy with Renzi’s public scolding and unconventional tactics , to react furiously, leading to a public spat that appeared to close the door to further concessions, and forcing Renzi in return to replace Italy’s long-standing permanent ambassador to the EU who was seen as too accommodating with Brussels.


Renzi, as we suspected, did not however budge on his demands, with Finance Minister Pier Carlo Padoan reiterating that Italy will not change its 2016 budget no matter what the European Commission eventually decides on flexibility. That, we believe, might be an exaggeration (eventually Renzi and Padoan will accept a good compromise) but it certainly does signal that Italy, just as France before, has no intention to allow the Commission to bully it into fiscal submission.


And at least for now, it is Brussels who has had to soften at least its public stance, while of course negotiations on substance are still ongoing, and will be for a few more weeks.


Incidentally, we also suspect Renzi vigorously made his case with German Chancellor Angela Merkel in their meeting last weekend, although there were no public accounts of discussions on this topic and Merkel struck a fairly non-committal tone in public afterwards.


In any case, Juncker (who we have written is indeed no great friend of the Stability and Growth Pact limitations at present himself) was swiftly reminded that flexibility is a fundamental part of the agreement cut between the Socialists and the People’s Party to appoint him as Commission President.


Our sense therefore continues to be that Italy will eventually negotiate a favorable deal, which will give Renzi the chance to increase spending, albeit slightly less than he had planned to do in order to save the Commission’s (and the SGP’s) face.


And ultimately, this goes to show how far we’ve come from the early days of the crisis, in 2012, when austerity was an unbreakable mantra; to a shifted stance that has the effect of pushing public spending in the EU, with the tacit approval, and cooperation, albeit from a much more solid fiscal position, even of Germany.

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