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What Lies Behind the Growth Discussion in the EU

Published on , , Sofia

It is finally clear what does the talking about economic growth measures in the EU mean, which started to gain momentum yet in January, around the negotiations of the fiscal compact, with the first informal European Council, dedicated entirely on this topic. Then during the spring EU summit, when a major topic again was growth. And precisely because it is being talked about growth for quite some time now, it was odd that this topic was raised again with new impetus and it even culminated in the pre-election campaign in France, won by the socialist candidate, Francois Hollande. He said to his supporters that he wanted a renegotiation of the fiscal compact so that it could include measures for economic growth.

Such a demand is strange, given that the treaty does contain similar texts. In Chapter IV, entitled "Economic Policy Coordination and Convergence", in Article 9 it is stipulated that the contracting parties commit to work together for economic policy that fosters the proper functioning of the economic and monetary union and economic growth through enhanced convergence and competitiveness. It is also pointed out that the countries commit to undertake the necessary measures in all areas that are essential for the appropriate functioning of the eurozone in pursuit of the objectives to foster competitiveness, employment and the sustainability of public finances.

And in Article 11 it is pointed out that the countries agree to benchmark the best practises and to work toward closer economic policy, to ensure that all the major economic reforms would be discussed ex-ante and where necessary they will be coordinated.

It is true that nothing specific is pointed out in the pact in terms of measures, but it is unequivocally stipulated that it is important the contracting parties to pursue policies, oriented toward boosting growth. Instead, more specific measures were outlined in a letter of 12 EU leaders, led by Britain and sent to their colleagues on the eve of the Spring European Council. Their letter consists of 8 points, which are not new in essence but call for completion of the single market, for removing the barriers in the labour market, liberalisation of the services sector, establishing a single market for energy, reform of the public administrations, creating venture capital funds, boosting innovative companies.

The letter received a very detailed response by European Commission President Jose Manuel Barroso, showing the stages of a number of the measures, what prevents the implementation of some of them and what is planned to be done on the new ideas. The conclusions from the spring council are in fact a combination of that correspondence, reaffirming the member states' commitment to the Europe 2020 strategy, as well as to the European Commission guidelines in the Annual Growth Survey.

Against the background of all this intensive talking about economic growth, the discussion about complementing the fiscal compact with measures for growth are a bit odd, but after the first summit between Angela Merkel, the German chancellor, and the new French president, Francois Hollande, it is clear what this is all about - injecting money in the economy, the so called stimulus, which many countries, among which USA and China, used in the beginning of the global financial and economic crisis in order to prevent a banking crisis and an economic catastrophe. It was these stimuli that actually caused the bubbling of public debts.

During their meeting in Berlin on May 15, Ms Merkel, after stressing that the fiscal pact was already agreed and that in parallel to it a discussion on economic growth was taking place, she announced that there was an agreement for a meeting of the employers' organisations from France and Germany at which proposals would be prepared for the June European Council. For his part, Francois Hollande noted that he would like the word 'growth' not to be an empty word but something to be felt in reality. The best approach would be, he said, on May 23rd, when the leaders will meet for an informal dinner, everything to be put on the table in a search for the most appropriate measures to boost growth - be it in terms of improving competitiveness or investments for the future, or Eurobonds - everything must be put on the table, the French leader underscored.

To a straightforward question of a journalist regarding his ideas for an overhaul of the fiscal compact, Mr Hollande noted that a legal opportunity would be sought for this to happen but added that the main thing was everything to be put on the table. The Franco-German summit also made it clear that Merkel and Hollande, already successfully called Merkollande, had driven their positions closer and the figure of a new construction started to emerge, consisting of two pillars: the fiscal compact as a first pillar, supporting fiscal stability and prudent spending, and the second pillar, supporting growth measures. But what does this mean was unclear literally hours before in an interview with the American TV station CNBC the German chancellor called the things by their real names. What was at stake was a financial injection for the rescue countries, which are at risk of possible Greek falling out of the eurozone.

"We want Greece to stay in the eurozone. If Greece believes that there are certain stimulus to be pursued for growth in the eurozone, which we can pursue in the interest of all of us, we are open for this. Germany is open for this", said the chancellor of Germany. These words quite specifically mean that Germany is ready to open the coffers, but this time in order to pour money in measures boosting growth not only in Greece. For The New York Times, Fabian Zuleeg, the chief economist of the European Policy Centre, points out that this support could come in the form of money from existing European Union funds that would be redirected for use by crisis countries. An approach, which, according to him, was championed by Francois Hollande.

Such measures have already been undertaken, as for the financial troubled countries the EU agreed, after a Commission proposal, their national co-financing share for the EU funds to be reduced in order to facilitate the EU funds absorption on programmes, aimed at boosting economic growth and jobs creation. At the European Growth Council on January 30th, President Jose Manuel Barroso announced that unused funds, worth 82 bn euros from the current financial framework, could also be used for measures boosting growth and jobs.

The situation in Greece, though, is in such an advanced stage that it would be hard for us to imagine what amounts of money would be needed in order to avoid bankruptcy and leaving the single currency. In the last days it is reported of a mass money exodus from Greece, a "drahmatic" scenario is also being discussed to end the Greek drama, and even before the May 6 elections the public domain is flooded by scenarios for a Greek leaving the eurozone, called where jokingly where quite seriously a Grexit (Greece + exit).

The biggest nightmare of the EU leaders right now, however, is, as many experts also warn, that a possible Grexit might drag all the other weak states out - Spain, Italy and from then on the chain reaction is unpredictable. It is obvious that Ms Merkel needed a lot of time and probably a strong opponent in the face of the new French president, Francois Hollande, in order to step back from her firm position, defended literally to the very meeting with him, that the budget discipline measures were the right path. At the moment, the solution that is being worked out, is a synthesis of strict budget discipline and investments with public money. In other words, with one hand the EU will take (through the austerity measures, implemented by the national governments) and with the other it would give (through the EU funds for growth stimulating measures).

Whether this new system would work, especially for Greece, remains the big question at this stage, which will be discussed for the first time at European level by the leaders on May 23rd. The next big question will be 'how much'. In the public domain calculations are spreading that the Grexit would cost around 1 trillion euro. Just to compare, almost that big is the 7-year budget of the EU for the current programming period (2007-2013).

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