Budget Rules Refugee Crisis Threatens Euro Austerity

Germany doesn't want countries in the single currency to use the refugee crisis as an excuse to abandon budgetary restraint, but must give battered Greece some flexibility to win its support for the deal.
Demonstrations continue over austerity policies.

The question of how to pay for Europe’s refugee crisis is dividing the euro zone, and Germany is increasingly worried some countries may take advantage of the political turmoil to evade the austerity rules imposed on the zone.

Last year the European Commission introduced the idea of allowing countries some flexibility in meeting the zone's so-called Stability Pact rules on budget deficits to deal with one-off crises.

Italy in particular is leading the charge to intepret this to mean that it should not matter if the costs of integrating, repatriating refugees pushes a country’s budget deficit above agreed limits.

Gianni Pittella, head of the Progressive Alliance of Socialists and Democrats in the European Parliament, and a close ally of Italian Prime Minister Matteo Renzi, told Handelsblatt: “All costs caused by the refugee crisis should be deducted from the budget deficit. It's not just Italy that wants this: Austria and Greece do too.”

Mr. Pittella claims that the European Commission president, Jean-Claude Juncker, support the idea, but Mr. Schäuble and the head of the Eurogroup of euro-zone finance ministers, Jeroen Dijsselbloem are opposed.

So far though, the German government is not prepared to give its general blessing to deducting refugee costs from deficits. “It’s the old debate about good and bad debts,” said a government representative in Berlin. “That’s only a diversionary tactic,” only an excuse why some states haven’t kept their promises to reduce deficits for years. “However, both good and bad debts have to be paid,” is the message from Berlin.

Mr. Schäuble is getting ready for battle over this issue. He has said that there is “a relatively concentrated attack taking place on the Stability and Growth Pact.”

Germany cannot afford to be too aggressive over the Stability Pact because it also needs the cooperation of other member states over help in dealing with refugees.

Spain is again expected to exceed the 3 percent deficit limit. And the European Commission came close to rejecting the draft Portuguese budget straight. Brussels is even fretting that Portugal might have to apply to the European Stability Mechanism for a new assistance loan this year.

But the biggest fight may come from Germany’s old ally, France. The second-largest euro state is reducing its budget deficit more quickly than expected but at a meeting in Brussels Monday economics minister, Emmanuel Macron, warned that the country’s priorities may not be the same as those of the European Commission. “The austerity policy pursued up to now is wrong. What we need is a more expansive budget policy. We have to change budget policy, not in bilateral talks, but at Community level,” he said. France could well be planning such an initiative at the end of the year to coincide with President François Hollande’s presentation of reform proposals for the euro zone.

If France launches its new attack in Brussels Mr. Schäuble has counter-proposals in place. In a position paper, he puts forward the idea of outsourcing budget supervision to an independent authority. The hope is that such an authority would be less susceptible to national influences than the European Commission and therefore more rigorous.

But Germany cannot afford to be too aggressive over the Stability Pact because it also needs the cooperation of other member states over help in dealing with refugees. Germany has taken in the lion’s share of asylum seekers in the last year, but chancellor Angela Merkel wants to persuade other countries to take a larger share of the responsility. In this, Germany has found an unexpected ally in Greece, which is struggling to limit the number of people coming into Europe through its borders.

When the Greek prime minister, Alexis Tsipras, posted a message on Twitter on Tuesday calling for European solidarity on the issue Chancellor Merkel's chief of staff, Peter Altmaier, replied: “I can only agree.”

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Ms. Merkel’s priority is to tackle and solve the refugee crisis in the Aegean Sea between Greece and Turkey. For this to work, she needs the co-operation of both countries. Ever since Macedonia closed its border to keep out the refugees, Greece is threatened with total collapse.

The German government has been one of the loudest voices calling on other European countries to help Greece. According to Greek media, Athens has applied for an E.U. support package of €470 million, or $432 million.

The German government insists that Greece will not be allowed off the hook in terms of the austerity measures it agreed to last year in exchange for a bailout, but it is being emphasized with surprising frequency that the reform program does offer a certain flexibility – something that was not heard before.

However, this flexibility is in itself becoming something of a tightrope walk. Because the International Monetary Fund insists on the bailout program being implemented, tending to err on the side of austerity rather than magnanimity. At the beginning of the year its negotiators warned the Europeans against making too many concessions in any assistance program to the Greeks because of the refugee crisis.

Ms. Merkel and Mr. Schäuble cannot risk antagonizing the IMF over the issue and run the risk that it withdraws from supporting the Greek bailout. If the IMF withdraws, Ms. Merkel will find it near impossible to convince the German parliament to sign off on any further aid payments.


Ruth Berschens heads Handelsblatt's Brussels office, leading coverage of European policy. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin and is deputy managing editor of Handelsblatt's Berlin office. To contact the authors: [email protected] and  [email protected]