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EUROPEAN UNION

French politicians mull ripping up EU budget rules

Nobody yet knows the winner of France's presidential election next year, but the smart money is on one loser: The three-percent cap on government deficits enshrined in eurozone rules.

French politicians mull ripping up EU budget rules
French Finance minister Michel Sapin leaves a cabinet meeting on September 8, 2016 at the Elysee presidential Palace in Paris. Miguel Medina/AFP
A bedrock of euro stability for some, the requirement to keep government deficits to below three percent of gross domestic product (GDP) is seen by many as an insufferable straight-jacket on governments wanting to spend their way out of economic sluggishness.
   
Many French politicians, on the left and right, wonder aloud whether France should start ignoring the EU Commission and three-percent defenders, including powerhouse Germany, and break free.
   
“The European left, Social Democrats, should speak more about economic revival, about loosening the rules of the Stability Pact,” Prime Minister Manuel Valls said at the end of August.
   
The EU's Stability Pact is meant to ensure public finances remain sound and has underpinned the austerity policies of many nations since the global economic crisis.
   
It was an unusual message from Valls, who has a reputation as a budget hawk and has several times pushed through deficit reductions sought by Brussels. But his finance minister was quick to add that Paris would honour its promise to bring its public spending deficit down to 2.7 percent next year.
   
“That doesn't concern 2017, it is a debate on afterwards,” said Michel Sapin.
   
Even as he unveiled this past week billions in tax cuts to businesses and households for 2017, Sapin reaffirmed France would meet its deficit target.
   
“We've made that promise to parliament and EU authorities and we're going to keep it,” he told AFP in an interview.
   
But despite such promises, France's Court of Auditors warned recently that Paris risked again missing the three-percent target in 2017, after years of already doing so. The EU has warned that France will not be allowed to exceed the three-percent deficit target again.
   
France “has been granted a delay of two years twice. This will not be extended again,” EU Economic Affairs Commissioner Pierre Moscovici said in January.
   
But Sapin nevertheless considers the debate legitimate about the future of the EU budget rules given the changed circumstances, particularly the need for increased spending on security given the wave of terror attacks in Europe.
 
Such statements “clearly mark a change in direction”, said Alain Trannoy, head of research at the School for Advanced Studies in the Social Sciences in Paris. He noted that criticism of the pact, agreed in 1997 as preparations for the introduction of the euro stepped up, has spread across the political spectrum.
 
“The Maastricht and Lisbon treaties have bogged down the eurozone in crisis, locked it in absurd, obsolete and suicidal rules”, said Arnaud Montebourg, a former Socialist economy minister who announced his run for the presidency last month. The two treaties underpin the euro and public finance rules in the eurozone. 
 
Montebourg's view is shared by both the far left which is anti-austerity, and by the far-right National Front on national sovereignty grounds. It also appears to be making inroads among the Republicans, the
centre-right party, which is in favour of massive cuts in taxes to stimulate the economy.
   
If certain candidates in the Republican presidential primary, such as Francois Fillon or Herve Mariton, still insist on the need to rapidly return to a balanced budget, others remain vague on spending cuts to compensate for their promised fiscal jumpstart to the economy.
   
“For Brussels as well as our European partners and the holders of French debt, what counts is that we attack the structural cause of the deficits,” said former president Nicolas Sarkozy, who is vying to win the Republican nomination, when asked recently about the Stability Pact.
 
Trannoy believes that while the criticisms by the candidates must certainly be considered in the light of presidential campaign, they also reflect growing concerns that the EU's budgetary austerity has held back economic growth and job creation.
   
“The current rules don't work,” said Mathieu Plane, a researcher at the French Economic Observatory at the Sciences Po university in Paris. “Reducing debt is necessary, but restrictive policies are not necessarily
the best means,” he said.
   
The European Commission can impose massive fines on countries that fail to take sufficient steps to bring down their public deficits.
   
It has threatened to do so in recent years in order to enforce budgetary discipline although many economists believe eurozone states should take advantage of ultra-low interest rates to make needed investments in
infrastructure and boost their economies, even though debt levels are worryingly high.
   
Trannoy said there was a bit of “curious timing” to the comments as France's economy is expanding, if just barely.
   
“The economic rule is to make deficits when things are going bad and cut back when things are getting better. Yet things are getting better.”

EUROPEAN UNION

The Euro celebrates its 20th anniversary

The euro on Saturday marked 20 years since people began to use the single European currency, overcoming initial doubts, price concerns and a debt crisis to spread across the region.

The Euro celebrates its 20th anniversary
The Euro is projected onto the walls of the European Central Bank in Brussels. Photo: Daniel Rolund/AFP

European Commission chief Ursula von der Leyen called the euro “a true symbol for the strength of Europe” while European Central Bank President Christine Lagarde described it as “a beacon of stability and solidity around the world”.

Euro banknotes and coins came into circulation in 12 countries on January 1, 2002, greeted by a mix of enthusiasm and scepticism from citizens who had to trade in their Deutsche marks, French francs, pesetas and liras.

The euro is now used by 340 million people in 19 nations, from Ireland to Germany to Slovakia. Bulgaria, Croatia and Romania are next in line to join the eurozone — though people are divided over the benefits of abandoning their national currencies.

European Council President Charles Michel argued it was necessary to leverage the euro to back up the EU’s goals of fighting climate change and leading on digital innovation. He added that it was “vital” work on a banking union and a capital markets
union be completed.

The idea of creating the euro first emerged in the 1970s as a way to deepen European integration, make trade simpler between member nations and give the continent a currency to compete with the mighty US dollar.

Officials credit the euro with helping Europe avoid economic catastrophe during the coronavirus pandemic.

“Clearly, Europe and the euro have become inseparable,” Lagarde wrote in a blog post. “For young Europeans… it must be almost impossible to imagine Europe without it.”

In the euro’s initial days, consumers were concerned it caused prices to rise as countries converted to the new currency. Though some products — such as coffee at cafes — slightly increased as businesses rounded up their conversions, official statistics have shown that the euro has brought more stable inflation.

Dearer goods have not increased in price, and even dropped in some cases. Nevertheless, the belief that the euro has made everything more expensive persists.

New look

The red, blue and orange banknotes were designed to look the same everywhere, with illustrations of generic Gothic, Romanesque and Renaissance architecture to ensure no country was represented over the others.

In December, the ECB said the bills were ready for a makeover, announcing a design and consultation process with help from the public. A decision is expected in 2024.

“After 20 years, it’s time to review the look of our banknotes to make them more relatable to Europeans of all ages and backgrounds,” Lagarde said.

Euro banknotes are “here to stay”, she said, although the ECB is also considering creating a digital euro in step with other central banks around the globe.

While the dollar still reigns supreme across the globe, the euro is now the world’s second most-used currency, accounting for 20 percent of global foreign exchange reserves compared to 60 percent for the US greenback.

Von der Leyen, in a video statement, said: “We are the biggest player in the world trade and nearly half of this trade takes place in euros.”

‘Valuable lessons’

The eurozone faced an existential threat a decade ago when it was rocked by a debt crisis that began in Greece and spread to other countries. Greece, Ireland, Portugal, Spain and Cyprus were saved through bailouts in return for austerity measures, and the euro stepped back from the brink.

Members of the Eurogroup of finance ministers said in a joint article they learned “valuable lessons” from that experience that enabled their euro-using nations to swiftly respond to fall-out from the coronavirus pandemic.

As the Covid crisis savaged economies, EU countries rolled out huge stimulus programmes while the ECB deployed a huge bond-buying scheme to keep borrowing costs low.

Yanis Varoufakis, now leader of the DiEM 25 party who resigned as Greek finance minister during the debt crisis, remains a sharp critic of the euro. Varoufakis told the Democracy in Europe Movement 25 website that the euro may seem to make sense in calm periods because borrowing costs are lower and there are no exchange rates.

But retaining a nation’s currency is like “automobile assurance,” he said, as people do not know its value until there is a road accident. In fact, he charged, the euro increases the risk of having an accident.

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