BRUSSELS, 24 March 2005 — They call themselves the European Union motor and at the bloc’s summit yesterday, heavyweights France and Germany were clearly back in the driver’s seat. Sweeping aside predictions that eastward expansion of the European Union would dilute their influence, Berlin and Paris pushed through their economic agenda at the two-day Brussels meeting.
Their first coup: Watering down the euro zone’s already battered stability pact to accommodate ballooning budget deficits. France and Germany have overshot the pact’s once-sacred rule that national deficits not exceed 3 percent of GDP. Both have done so not once but every year since 2002 — and are likely to do so again in 2005. French President Jacques Chirac and German Chancellor Gerhard Schroeder thus had a special interest in forcing through revision of the euro zone fiscal rulebook to gain more leeway to spend their way out of economic slowdown. “There is more flexibility,” said Schroeder.
Reaction to the move was mixed. Rainer Guntermann, senior European economist for Dresdener Kleinwort Wasserstein in Frankfurt said it might help keep European Central Bank interest rates higher. “It adds an element of uncertainty for the ECB,” he said. But John Palmer of the European Policy Center in Brussels, said the revised pact went back to the original EU concept that growth and economic conditions have to be taken into account when judging budget discipline.
The second Schroeder-Chirac victory: Winning a radical rewrite of a blueprint to deregulate the EU’s key services sector which accounts for 70 percent of bloc’s economy. “It is indispensable to clear the table and start from scratch ... this (services) text is unacceptable,” declared Chirac. Schroeder added: “It must be fundamentally changed.”
Chirac came to the summit under intense pressure after two opinion polls this week showed a surprise majority for “no” votes in a May 29 referendum in France on the planned EU constitution. French workers and the government fear that opening up EU services — currently regulated by national laws in member states — would lead to a flood of cheap labor from new EU states where labor costs are far lower than in the west. With German unemployment a record 12.6 percent, Schroeder, was also no mood to see more eastern European workers in Germany. The chancellor therefore joined Chirac to rage against so-called “social dumping” and demand a far more limited deregulation of services.
The re-emergence of the Franco-German power duo in EU policy-making comes after last year’s historic expansion bringing in 10 new members had led many to speculate that the old Berlin-Paris axis would become history in a new era of shifting alliances. For a time both countries kept a lower profile. But the economic challenges posed new EU members who have recently shed communism and are fervent believers in market economies and deregulation have prompted Chirac and Schroeder to fight back.
Both countries are joining forces for the mother of all EU battles coming up in June: Who pays what and who gets what from the bloc’s 2007 to 2013 spending plan. Schroeder vowed that Berlin would not increase its contribution to EU coffers over 1 percent of GDP. Germany is the bloc’s biggest paymaster and already contributes over 20 percent of the total EU budget which is about 100 billion euros a year. Chirac was equally adamant that countries being asked to observe fiscal austerity at home could not be hit up for more funding for Europe.
EU budget fights are always bitter and the last one at a 1999 summit in Berlin dragged on for 28 hours.
