Facing into a battle royal

THE election of socialist François Hollande should mark a major change in the mood music among EU citizens, hard-pressed by recession and austerity.

But while he will carry the hopes of many for a brighter tomorrow, his scope to bring about change will be limited by the realities of international finance, domestic interests and the path on which the eurozone is already well launched.

Even for Ireland — where Nicolas Sarkozy was perhaps one of the most hated men in Europe over his demands the country increases its corporation tax rate — the impact could be minimal.

France after all believes in high taxes, its government is one of the highest spenders on social welfare, education, pensions, and health, while Ireland prides itself in being an open economy with low taxes.

The scene is set for a clash of cultures when Ireland will be in the driving seat as EU President from January for six months in which some major issues will arise — and the country will need a good relationship with the French president.

Hollande’s demand for changes to the Fiscal Treaty could be the first effect he has on Ireland since he is demanding changes to a document that is the subject of a referendum. He has said he will not ratify it without a growth pact. The Taoiseach, the Tánaiste and the minister for finance all say this is music to their ears — they want a growth pact, provided it does not change the treaty if the referendum approves it.

But what about other taxes? Ireland is committed to cooperate with an EU discussion on taxes. And while the country can veto any attempt to change the corporation tax rate, there are worse things, like who gets to collect the tax — an issue under discussion.

There is also the matter of the Financial Transaction Tax. The Government, rejects the tax even if it would mean an extra €700m for the exchequer.

The French and Germans are adamant they will go ahead with it, and will pressure other countries to join them. This will not change under a new president.

Ireland will hope Sarkozy’s contempt for small countries will not be continued by his socialist successor. The Labour party is a member of the socialist group — but let’s see if they manage to make that count when it comes to winning support for Ireland’s position on issues like the €31bn Anglo promissory notes.

Many hope Hollande will focus less on the inter-governmental, play less footsie with Germany and resurrect the role of the commission as the protector of the overall EU interest and smaller members.

There is talk of Germany wanting a new treaty to turn the EU into a federation like Germany — more inter-governmental, less powerful overall but in which the strongest would rule. This is not a traditional French vision, so they might want the smaller states to support them in their view.

Ireland will need all the support it can get when it holds the EU presidency and will be helping to steer the multi-billion euro six-year budgets for agriculture, fish and the EU. The Common Agriculture Policy is a French obsession since they benefit from it second only to Ireland on a per capita basis. But the socialists are pushing for a less subsidy style CAP which would not suit Irish interests. On the common fish policy, the French like the idea of a country being able to lease its quota to private interests. Ireland does not. It could be a battle royal with Simon Coveney chairing both the agriculture and fish meetings.

No matter who is in charge, there will be changes in France because of the ongoing euro crisis and the global slowdown.

Despite the state being responsible for spending 56% of the country’s GDP — one of the largest in the world — not running a balanced budget in 33 years and having a steady unemployment rate, ordinary people are better off than in Germany where its success has been financed largely by workers and as a consequence has a higher percentage of working poor. The realities will of course reduce Hollande’s room for change both in France and at EU level.

The markets seem to have regained their composure over his possible election and last week the cost of borrowing for the French was down under 3% again. Government debt is very high at 90% though private savings are big. The deficit is at 5.2% and banks are judged to be under capitalised. He has promised to bring in a balanced budget in 2017, return to pensions at 60 rather than 62. And he plans to spend €20bn to boost the economy with higher taxes on financial services and big businesses.

According to his campaign organiser and former MEP Pierre Moscovici, Hollande’s first port of call will be Berlin. It would be nice to be a fly on the wall during that first meeting with the German chancellor.

Angela Merkel has already said she agrees with having a growth pact, provided it is a sustainable growth policy, whatever that is. His aides have already hinted if she does not play ball, he could go to the June summit insisting the whole Fiscal Treaty be reopened. Nobody wants that.

Merkel will be happy enough to concede since it is also what the opposition German socialists want, and she needs them now to vote with her in the Bundestag.

So we can assume he will return to Paris happy. The National Assembly elections in June will be fought on the basis there will not be the three-fifths majority in the assembly needed to pass the treaty unless it has a growth component — something Hollande will know he already has under his belt. And then he is set to come to the summit with a socialist majority in the assembly — and knowing he can still use them as a threat to ensure he does get his growth.

A treaty even with 16 eurozone countries but without France would not matter a toss.

Nobody can afford to pump money into their economies right now, so they will focus on the ideas being put forward for some time by the commission — and which will be considered by the EU leaders at their June summit and likely to be agreed as a European Investment Pact, tacked onto the Fiscal Treaty.

Much of the ideas are based on using whatever funds there are to leverage private investment for projects that will boost growth and employment and also in themselves provide jobs. Stability bonds, project bonds, increasing investment in the European Investment Bank to allow them lend more — the problem will be finding the projects, and quickly enough, many believe.

And for the future, as far as the ECB is concerned, it is all about preparing for a fiscal union. What shape this could take will be the scene of the next battle— every bit as dramatic as the creation of the euro itself.

In the meantime, France and Germany will continue their spat over the role of the ECB, which will not help reassure markets.


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