Test of nerve for EU over fiscal discipline

Commission to publish assessments of national economies.

The eurozone’s claim that it has improved the surveillance of national budgets and tax policies will be put to the test next week, when the European Commission is to publish individual assessments of the national economies.

What may make or break the reputation of the eurozone’s surveillance will be how critical the Commission chooses to be of France.

Behind the scenes, Commission officials working for Olli Rehn, the European commissioner for economic and monetary affairs and the euro, are discussing the wording of their assessments.

While they want to give France’s newly elected president, Franc¸ois Hollande, some room for manoeuvre before he announces a comprehensive budget plan for 2013, they do not want to leave themselves open to the accusation that they are failing to hold eurozone governments to account.

The Commission acquired powers to intervene over national budgets under rules agreed by the EU last year, but what remains uncertain is how energetically the Commission will exercise those powers. In theory, the Commission has powers to demand that national governments keep their budgets under control.

The recommendations, to be published on Wednesday (30 May), form part of the ‘European Semester’ of economic policy co-ordination. They will specify further budgetary steps, structural reforms and growth-enhancing measures that member states should adopt over the next 12 months.

A senior EU diplomat said that the most significant element of the Commission’s country-specific recommendations would be the “very carefully crafted language about France”.

The diplomat said that those discussions went to the heart of the credibility of eurozone leadership. “It’s not about Greece or Portugal or Spain but about France,” he said.

He added: “The conversation that [the EU is] not having yet, but that will definitely come, is what is going to happen in France.”

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France is saddled with huge public debt, nearly 90% of gross domestic product (GDP), and its budget deficit in 2013 is expected to be 4.2% of GDP, significantly above its 3% target.

Hollande has vowed to bring the deficit under control, but his support for France’s 35-hour working week, his refusal to liberalise employment law and his pledge to reverse the plan of Nicolas Sarkozy, his predecessor, to raise the minimum retirement age from 60 to 62, clashes head-on with recommendations that the Commission is expected to make.

Leaders of the European Union’s member states were meeting in Brussels last night (23 May) for the first time since the election of Hollande as president, in what has been billed as an opportunity for Hollande to air his views on encouraging economic growth.

But ahead of their dinner diplomats were stressing that the informal discussions were only a prelude to the next formal European Council on 28-29 June.

By the time of that meeting, the political landscape may have shifted. Ireland will hold a referendum on the fiscal compact treaty on 31 May. France will hold parliamentary elections on 10 and 17 June. Greece will hold a second general election on 17 June.