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EU to hold France, Germany to account in push for growth


The EU will this week test a new system to ensure states toe economic rules when it decides whether to challenge eurozone giants Germany and France over their growth and deficit policies.

France and Germany, as the eurozone's biggest economies, "hold the key", the EU's Economic Affairs Commissioner Ollie Rehn said last week.

They would "do a great service to the eurozone if they were to follow the (economic policy) recommendations made by the Commission," he added.

The 17-nation eurozone escaped a record 18-month recession in the second quarter, but data since then suggests the recovery is modest at best doing little to reduce record high unemployment.

The wider 28-member European Union fared only slightly better as governments floundered in the debt crisis, forced into austerity policies to balance the public finances only to find growth disappearing as a result.

That makes third-quarter figures due Thursday all the more important, coming just the day after Rehn and the Commission fill in their report card on how member states are doing.

The aim of Wednesday's Annual Growth Survey and the Alert Mechanism Report is to help coordinate economic policy to deliver growth and jobs.

Essential to that task is to get misfiring France pulling together with runaway leader Germany, whose export-led growth model is increasingly seen -- by Rehn and many others -- as a source of damaging economic imbalances.

Chief among those imbalances, the German trade surplus which hit another record at 18.9 billion euros in September, driven by exports to its EU partners.

If Germany boosts consumption and imports more, that would increase exports from other EU countries to Germany.

"With low import demand, Germany is not strongly supporting countries to rebalance," Natixis economist Johannes Gareis said of the September trade data.

The result is a German trade surplus above 6.0 percent of its gross domestic product since 2007, constituting an 'economic imbalance' which the Commission could now formally ask Berlin to remedy.

Germany should boost wages: Rehn

Rehn, stressed on his blog on Monday, that there were no easy answers but argued that "removing the bottlenecks to domestic demand would contribute to a reduction in Germany's external trade surplus."

"In particular, Germany should create the conditions for sustained wage growth," Rehn said.

The timing of such a call is sensitive -- German Chancellor Angela Merkel is embroiled in difficult talks with her Social Democrat opponents on forming a coalition government.

Merkel's government has dismissed the criticism as "incomprehensible," saying Germany's economy is well run and plays its full role in Europe.

France is also under the spotlight but for other failures, with Rehn pressing Paris to take essential reforms to put the economy back on track.

If Germany does its bit and France reforms "its labour market, business environment and pension system to support competitiveness, they will together do a great service to the entire eurozone -- providing stronger growth, creating more jobs and reducing social tensions," he wrote.

European Commission head Jose Manuel Barroso pressed Paris for change, warning that "fiscal policy in France has reached the limits of acceptability," with taxes weighing on growth.

"France is by far the country (in the EU) where companies pay the highest taxes and that's a problem for growth and employment," Barroso told the LCI network late on Monday.

Earlier this year, the Commission gave France an extra two years to 2015 to meet the EU public deficit limit of 3.0 percent of GDP in return for a commitment to far-reaching reforms.

Its test comes on Friday, when armed with new powers gained at the height of the debt crisis, the Commission will for the first time pronounce judgement on eurozone member states' 2014 budgets before national parliaments do.

EU officials said Tuesday that this will come in the shape of an "opinion" about whether a draft budget is sufficient to meet targets laid out for the deficit and debt.

Such opinions are expected to be taken into account but "it is not compulsory for national parliaments" to do so, one EU official said.