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EUROZONE : CONCERNS RISING OVER ECONOMIC GOVERNANCE.

Worries and a great deal of manoeuvring mark the eve of French President Nicolas Sarkozy's visit to the Eurogroup. While the new French prime minister confirmed, on 3 July at the National Assembly, that the reduction of public deficits for 2008 would definitely show a downward change(1), some are concerned with the future of economic governance within the eurozone. Even more so since on 29 June Italy also stated that it was in favour of a break' as of 2008 in the reduction of its deficits (otherwise Romano Prodi's coalition risks collapse). If these tendencies are confirmed, "it is the new credibility of the preventive aspect of the Stability and Growth Pact which will be questioned," predicts a European source. Worse: the Berlin agreement adopted last April by the ministers of the Eurogroup would be reduced to shrinking away to nothing (see Europolitics 3292).

But it is especially Sarkozy's announced visit to the Eurogroup's 9 July meeting which, behind the scenes, some officials find rather irritating. "If the French president simply wants to inform ministers about his economic programme without any possibility of a dialogue, then that does not any longer fall under coordination [of economic policies]," an official commented. Meanwhile, others are getting impatient: "If everyone thinks that history starts the moment that he has come into power, then it is not going to work".

EXCESSIVE BURDEN OF PUBLIC EXPENSES

"For France, the question is to know if there are economic reasons to reduce the rhythm in budgetary consolidation," one of France's partners commented maliciously. For this expert, the answer is of course negative. "France's problem is especially one of persistent structural problems, its labour market rigidity and the excessive burden of public expenditures as compared to GDP," insisted this same expert.

Analysing the measures announced by France to relaunch growth and employment, the expert firmly criticised the proposal for the reduction of loan interests connected to the purchase of housing promised by Nicolas Sarkozy. This fiscal measure is not only judged to be non-productive but especially non-structural. Concerning other reforms planned by France, "they will need to be analysed in detail to determine their long-term impact - a real cost benefit study". Many are questioning France's credibility: on the one hand, Paris would unilaterally withdraw from its previous commitments (by postponing by two years the return to balanced public finances), while on the other hand it is expressly asking that the governance of the eurozone be strengthened.

An observer ironically commented that "if for Paris governance is to question the independence of the European Central Bank via the political debate on exchange rates, discussions will not go very far".

On 2 July in Strasbourg, Nicolas Sarkozy relaunched criticism of the strong euro' which, in his opinion, saps France's competitiveness. He also expects greater political intervention from the ministers in view of the ECB's strong authority. It should be noted that this analysis was questioned on 3 July by the quarterly report on the status of the eurozone published by the European Commission (see Europolitics 3340).

INCONSISTENCIES

Although there are some signs of a tendency towards opening up, others would still be hostile to ministers discussing with the ECB (in a more detailed manner) about change-related issues in conformity with Article 111 of the EC Treaty. But one condition is specified: "If the Eurogroup does not have a consistent position (concerning budgetary coordination) which really commits the members of the eurozone, then we cannot continue to mention the need to improve structural dialogue with the bank. Faced by the inconsistencies of the thirteen, it is the ECB's vision which is winning over".

(1) According to some European estimates, the French deficit in 2007 should be maintained at the 2006 level (about 2.4% of the GDP). Idem for 2008, while the Commission had expected a deficit of around 1.6%.
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Publication:European Report
Geographic Code:4E
Date:Jul 5, 2007
Words:641
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