Who rules? Euro zone budget tensions surface

By Alastair Macdonald and Jan Strupczewski

BRUSSELS (Reuters) - Berlin's brusque "Nein" on Thursday to a call from Brussels for it to loosen its budget to help the euro zone's struggling south exposed tensions over who should control the currency union and police its rules.

Wolfgang Schaeuble, whose German finance ministry rejected the European Commission's call for it to spend more, went public last month to say the EU executive had become too "political" to act as impartial enforcer of euro zone fiscal rules and should hand the role to a new supervisor.

For his part, Commission President Jean-Claude Juncker makes no bones about interpreting those rules to counter nationalist movements across Europe that are using discontent with years of German-driven euro zone austerity to threaten the Union itself.

 

Citing "flexibility" built into the rules, the Commission has this year forsworn punishing Spain and Portugal for breaking budget deficit limits. It has shown similar indulgence to France, too, where the anti-EU National Front is challenging for power next year and to the beleaguered Italian government.

Stung by Britain's vote to leave the EU, and now by the uncertainties of U.S. policy under Donald Trump, the Commission sees itself as fighting for the very survival of the Union.

"The Commission's handling of the budget rules is, in fact, populist - it depends on the political need at a given time," said one senior EU official who believes that may have gone too far. "In the end, it is the same as if there were no rules."

Schaeuble, a conservative who argues that southern Europeans need structural economic reforms to help them clean up public finances and restore growth, has voiced sympathy for Brussels' efforts to challenge rising euroscepticism, but sees a downside.

"The current Commission has chosen to be more political and it has every right to do so," he said last month. "But this makes it more difficult to impose (budget) compliance."

He suggested that the European Stability Mechanism (ESM), set up by euro zone states during the debt crisis to bail out governments, could play a role in enforcing the rules. A coming revision of the ESM's status could provide an opportunity, but there is no consensus on that among the 19 euro zone countries.

Schaeuble has backing from northern allies; Dutch Finance Minister Jeroen Dijsselbloem, a centre-left politician who chairs the Eurogroup of ministers running the currency bloc has argued for an independent Fiscal Board to police budget rules.

Juncker's economics commissioner, Socialist former French finance minister Pierre Moscovici, spelled out on Wednesday his view that the Commission should be acting as "finance minister of the euro area" and setting overall budget strategy.

But while there is a consensus, after the Greek and other sovereign debt crises, that the euro needs more intense cooperation, different national traditions make a common line hard to define.

For many Germans, with a historic fear of the hyperinflation they associate with the rise of Hitler, the euro is essentially their Deutschmark, shared with others and requiring similarly rigorous fiscal control. Chancellor Angela Merkel's big election headache next year comes from even more hawkish eurosceptics.

But in southern Europe, with a history of using devaluation and inflation to manage the economy, German rules are irksome.

"For the Balts, Scandinavians, Dutch, Germans, rules-based approaches are very important," one senior EU official said.

"They get genuinely upset if others don't take it seriously ... Not abiding by these rules is something that they think ... undermines the political legitimacy of (the euro), because it was sold as the foundation that everybody agreed to."

In other parts of Europe, however, the idea of an unelected arbiter has sounded variously like diktat from Berlin -- as seen in Greek reactions to Eurogroup demands for spending cuts -- or international technocratic elites usurping democratic control, a notion that echoed through the recent Brexit and U.S. campaigns.

Euro zone leaders agreed last year to launch an overhaul of the currency's rules next year that should end by 2025. In a joint statement in June, euro zone finance ministers said they were worried the Commission was not applying the laws in the same way to large and small countries, undermining confidence.

"The more flexible the system is, the more you're subject to political pressure," said Thomas Wieser, the EU official who runs preparations for Eurogroup meetings. "It would be in the interest of everyone if we could revert to a system of very clear rules where there is little scope for judging it."

Reforms are, however, far from being agreed. Giving the ESM a role in judging budgets, as Schaeuble suggests, could get tied up with other pending changes in the fund's status and does not appeal to those suspicious of "apolitical" technocratic reviews.

But most policymakers agree the euro zone will need various changes in the coming years to address weaknesses and that a new form of budget supervision could well be part of a broader deal.

(Editing by Richard Balmforth)