EU Fiscal Fight Looms as France, Germany Rehearse Lines

European governments headed for a fresh skirmish over budget-deficit rules, with France and Italy eager to bury the German-led austerity policies that marked the response to the debt crisis.

French Finance Minister Michel Sapin and his Italian counterpart, Pier Carlo Padoan, rehearsed arguments for pro-growth budgets that will be rolled out when the next European Commission reviews national tax and spending plans for 2015.

“We simply need to find the right rhythm for each country for the return to the appropriate budget situation, so that the reduction of the debt and deficit is done in a way that brings growth,” Sapin said at a meeting of euro-area finance ministers in Luxembourg yesterday.

Political opportunism has always clashed with economic reality in euro deficit debates. Germany forced through a loosening of the rules in 2005 after exceeding the deficit limit, only to re-tighten them after Greece’s exploding debt put the euro at risk in 2010.

At issue now is the interpretation of the new rules, with French President Francois Hollande under pressure to deliver more growth and lower unemployment after the extremist National Front rattled the government by taking first place in France’s European Parliament elections.

France’s deficit will be 3.9 percent of gross domestic product in 2014 and 3.4 percent next year, missing the EU’s 2015 deadline to come under the 3 percent limit unless the government makes more savings, according to EU forecasts.

‘Enough Flexibility’

Sapin said France isn’t seeking to change the rules and German Finance Minister Wolfgang Schaeuble said a revision isn’t in the cards anyway. Schaeuble hewed to the German line that “the current rules have enough flexibility.”

Schaeuble said the German government is “unanimous” in that view, a dig at a call earlier this week for flexibility by Economy and Energy Minister Sigmar Gabriel of the Social Democrats, the junior party in the German coalition.

Italy, already under the 3 percent limit, can live with the current setup as long as the accent is on growth instead of austerity, Padoan said.

“We have not asked for flexibility, but we are calling for all instruments which Europe already has at its disposal to be used as measures to instigate economic growth,” he said.

A review of the new rules will get under way later this year, providing another opportunity for France and Italy to tilt the euro system from austerity to growth. Most rule changes require a unanimous agreement, handing a veto to Germany and its fiscally disciplined allies.

One of those allies, Finance Minister Jeroen Dijsselbloem of the Netherlands, proposed granting countries more time to cut deficits only if they “immediately, upfront” enact reforms designed to make their economies more competitive.

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