Europe Letter: Fair treatment for Greece vital in bailout talks

The Government may have been criticised for playing politics by announcing an expansive spring statement just months ahead of a general election, but Brussels also played a key role in allowing the plan to be brought forward this week.

The campaign to secure flexibility in terms of Ireland's budget targets began last month. At a key eurogroup meeting in March, Ireland, along with Portugal and others, called for flexibility to be extended to all member states, after ministers agreed to give France, Italy and Belgium extra time to meet EU targets.

For France it was the third reprieve in six years, as it was granted two extra years to meet its deficit target. Minister for Finance Michael Noonan was unequivocal after the meeting. "I supported the [European] commission proposal, including the extension to France . . . but I used the opportunity to say that we needed the flexibility in the application of the rules as well."

As confirmed in a letter from EU economics commissioner Pierre Moscovici to Brian Hayes last week, the Government has now won this flexibility, allowing the Coalition to announce a tax-reduction plan for the next five years.

The decision will be closely watched by other member states.

Equal treatment

The principle of equal treatment for equal members lies at the heart of the union, but the EU has struggled to ensure the strict application of rules to all its members. The problem was evident from the very start of monetary union. Having campaigned strongly for strict fiscal rules in the run-up to the Maastricht treaty,

Germany

, along with France, then flouted the terms of the Stability and Growth Pact in the early years of the single currency.

The problem intensified with the economic crisis and the strengthening of the pact through the so-called “two-pack” and “six-pack” rules, voted on by Ireland in the 2012 fiscal compact treaty . The new laws – which represented a significant ceding of national economic governance to Brussels – engendered a fiendishly complex annual cycle of economic surveillance known as the European semester.

As four euro-zone countries entered rescue programmes during the sovereign debt crisis, taking themselves temporarily out of the regular European semester process and into streamlined bailout programmes, some of the bloc’s biggest members were in the meantime struggling to meet their targets.

Italy and France have been the chief culprits. Italy, struggling with one of the highest debt-to-GDP ratios in Europe, has breached the EU's debt target of 60 per cent of GDP, while France has consistently missed budget deficit targets, defying the European Commission's calls for greater fiscal reform. Germany has not escaped censure either. Last year the commission warned the euro zone's largest economy about its current account surplus – a ratio that indicates low investment – which is seen as a drag on euro-zone growth.

Politically, all this matters hugely for the credibility and cohesion of the EU. The re-emergence of the Greek crisis has put a spotlight on how far the euro zone is prepared to go on flexibility. The plea by Greek prime minister Alexis Tsipras for leeway on Greece's severe bailout programme has largely fallen on deaf ears, though the Greek position has not been helped by the intransigence of the Greek negotiation strategy.

Softening

There may be some softening of the position, however. Tsipras’s decision to remove the intractable finance minister

Yanis Varoufakis

from his negotiating team indicates some progress in negotiations could be imminent. While it is virtually certain

Greece

will have to make concessions in implementing pension and labour market reforms, there are indications the institutions may be willing to compromise on the thorny issue of Greece’s high primary surplus – a key demand of its bailout.

The suggestion by French finance minister Michel Sapin on Friday that he would accept a smaller primary surplus from Greece "as long as it remains positive" is a sign even France is aware that the optics of "one rule for us, one rule for others" is unsustainable. Further, the issue is due to come into renewed focus within the next three weeks when the European Commission provides an update on member states' economic performance in its spring economic forecasts, an announcement that could come within days of the next key eurogroup meeting on Greece on May 11th.

As the EU continues to work to keep Greece within the euro zone, it will need to demonstrate its commitment to the spirit of EU solidarity and fairness as its negotiations with Greece enter a critical few weeks.