Berlin attacks EU's easing of austerity demands

The German and Finnish finance ministries have issued a stinging rebuke of Brussels' attempt to ease austerity demands on struggling eurozone countries, saying such flexibility improperly provided France and Spain with additional time to cut their budgets to meet EU deficit limits.

The rebuke, in an eight-page memo obtained by the Financial Times, accuses the European Commission of using "a somewhat arbitrary approach" in granting the budget flexibility to Madrid and Paris, and suggests "a separate pair of eyes" is needed to ensure Brussels is properly applying the new budget rules.

"Since 2012, the commission has substantially changed the way it assesses whether a Member State has taken 'effective action' to comply with [EU budget rules]," the memo states. "The recent methodological changes imply the risk of watering down the newly strengthened [rules] at its implementation stage."

The memo on the budget rules, which were adopted three years ago at the height of the eurozone crisis, was distributed to all 28 EU national capitals last week and debated by finance ministry deputies in Brussels on Thursday.

The German and Finnish position is likely to reignite a bitter fight over whether the EU's austerity-led crisis response has exacerbated economic stagnation in the eurozone, a debate that largely faded last year after Olli Rehn, the EU's economic commissioner, awarded France, Spain and four other eurozone countries extra time to reduce their budget deficits below the EU-mandated cap of 3 per cent of economic output.

The memo comes the same week Mr Rehn issued economic forecasts that showed both France and Spain, even with an extra two years, were still failing to cut their deficits in line with EU recommendations.

France, which is now required to hit 3 per cent next year, is on track for a 3.9 per cent deficit instead, the forecasts predicted. Spain, which must reach 3 per cent in 2016, will see its deficit rise to 6.5 per cent next year.

The criticism also comes as the new Italian government of Matteo Renzi has hinted it too may seek more flexibility from Brussels in exchange for newly-announced economic reform efforts.

"The Germans and Finns are sending a very clear message to their French and Italian counterparts," said Mujtaba Rahman, head of European analysis at the Eurasia Group risk consultancy and a former commission official. "Talking a good game on reforms will not cut it if your numbers ultimately don't stand up."

A commission official involved in fiscal evaluations said the changes in budget assessments by Mr Rehn's staff were intended to arrive at a fairer measure government reform efforts, insisting they have made the annual evaluations more effective.

"Methodological refinements tend to imply an increase in complexity, and this case is no exception to the rule," the official said. "We consider that the price is worth paying for better serving the goal of the [rules]."

Ilkka Kajaste, a senior official in the Finnish finance ministry's economic department, characterised the memo as a "technical contribution" to ongoing reviews of EU rules, but acknowledged it reflected discomfort in Helsinki with the way the commission has applied them.

"Our concern is that the rules and procedures are increasingly complicated so that outsiders have difficulties to understand them," Mr Kajaste said. "There is a broad agreement that more transparency is needed." The German finance ministry did not respond to a request for comment.

The German and Finnish criticisms centre on Mr Rehn's decision last year to set aside a eurozone country's breach of agreed budget targets if his staff determines the government had taken "effective action" to get finances in order but failed to hit targets due to an unexpected economic downturn. Six countries, including three of the eurozone's five largest economies, were granted such leniency in 2013.

The memo states that by attempting to discern whether a government has done enough - rather than focusing on actual results - Mr Rehn's staff was implementing EU rules too subjectively. "The budgetary surveillance framework in the EU and the euro area as laid down in the [rules] is clearly based on fiscal outcomes . . . rather than on fiscal measures," the memo states.

In addition, it argues EU authorities are incapable of judging how much of a country's failure to hit targets is due to government inaction and how much are to external economic shocks. "It is impossible to precisely judge to what extent fiscal slippages are due to factors that are outside the control of the government."

Perhaps most troublingly for Mr Rehn, the memo argues the commission's new way of judging the deficit rules is so complicated that national capitals cannot understand it - it terms the methodology "essentially a black box" - and suggests an outside agency or national fiscal councils should be involved in reviewing Brussels' work.

Such a move would be an unprecedented usurpation of the European Commission's powers, which have greatly increased over the course of the crisis as eurozone countries grant it increasing authority to review national tax and spending plans.

"With the new methods and their application by the commission, it is almost impossible for the member states concerned, as well as for 'outsiders', to assess whether the member state has taken 'effective action' and thus complies with the [rules]," the memo said.

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