EU to hold France, Germany to account in push for growth

The EU will this week test a new system to ensure states toe economic rules when it decides whether to challenge eurozone giants Germany and France, over their growth and deficit policies. As the eurozone's biggest economies France and Germany "hold the key," the EU's Economic Affairs Commissioner Ollie Rehn said last week. They would "do a great service to the eurozone if they were to follow the (economic policy) recommendations made by the Commission," he added. The 17-nation eurozone escaped a record 18-month recession in the second quarter but data since then suggests the recovery is modest at best, and impacting very little on record high unemployment. The wider 28-member European Union fared only slightly better as governments floundered in the debt crisis, forced into savage austerity policies in a bid to balance the public finances only to find growth disappearing as a result. That makes third quarter figures due Thursday all the more important, coming just the day after Rehn and the Commission fill in their report card on how member states are doing. The aim of Wednesday's Annual Growth Survey and the Alert Mechanism Report is to help coordinate economic policy to deliver growth and jobs. Essential to that task is to get misfiring France pulling together with runaway leader Germany, whose export-led growth model is increasingly seen -- by Rehn and many others -- as a source of damaging economic imbalances. Chief among those imbalances, the German trade surplus which hit another record at 18.9 billion euros in September, driven by exports to its EU partners. That is the catch -- if Germany exports, it gets the benefit while other EU states miss out on the growth they might have got if they had made the products themselves. The other side of the coin is that the German focus on exports leaves domestic consumption as secondary, meaning the bloc's most powerful economy does not create increased demand for goods and services from other EU states. "With low import demand, Germany is not strongly supporting countries to rebalance," Natixis economist Johannes Gareis said of the trade data. The result is a German trade surplus above 6.0 percent of its Gross Domestic Product since 2007, constituting an 'economic imbalance' which the Commission could now formally ask Berlin to remedy. On his blog Monday, Rehn stressed there were no easy answers but argued that "removing the bottlenecks to domestic demand would contribute to a reduction in Germany’s external trade surplus." "In particular, Germany should create the conditions for sustained wage growth," Rehn said. The timing of such a call is sensitive -- German Chancellor Angela Merkel is embroiled in difficult talks with her Social Democrat opponents on forming a coalition government. Merkel's government has dismissed the criticism as "incomprehensible," saying Germany's economy is well run and plays its full role in Europe. France is also under the spotlight but for other failures, with Rehn pressing Paris to take essential reforms to put the economy back on track. If Germany does its bit and France reforms "its labour market, business environment and pension system to support competitiveness, they will together do a great service to the entire eurozone – providing stronger growth, creating more jobs and reducing social tensions," he wrote. Brussels earlier this year gave France an extra two years to 2015 to meet the EU public deficit limit of 3.0 percent of GDP in return for a commitment to such reforms. Its test comes on Friday, when armed with new powers gained at the height of the debt crisis, the Commission will for the first time pronounce judgement on eurozone member states' 2014 budgets even before they have been submitted to their national parliaments. Failure to satisfy the Commission could see it demand potentially explosive changes to meet the guidelines, or at least identify areas for improvement. In response to Standard and Poor's downgrade of France's sovereign debt rating to 'AA' from 'AA+' last week, the Commission expressed its confidence that Paris "will carry out the reforms because they are necessary."