Two countries face fines for breaking budget deficit targets as EU leaders – with exception of David Cameron and Czech leader – prepare to sign fiscal pact
The euro's tough new German-penned economic rulebook will be immediately tested by spiralling budget deficits in the Netherlands and Spain, raising the prospect of swingeing fines on the two countries, it emerged at an EU summit.
As eurozone leaders finally launched a second, €130bn (£108bn) bailout of Greece, EU chiefs, with the exception of David Cameron and the Czech prime minister, prepared to sign the new rulebook – the fiscal pact – on Friday morning. The rules are the main part of an attempt to get the eurozone's soaring debt levels under control.
But even before the ink is dry on the treaty, an anti-austerity backlash gaining ground across the EU looks like challenging its key provisions. New data from the Netherlands – a fiscal hawk throughout the euro crisis – revealed the scale of the challenge in a country seen as one of the eurozone's success stories.
Without tens of billions in spending cuts over the next three years, the Dutch will be in serial breach of the new pact, which empowers the European commission to levy fines on fiscal sinners quasi-automatically.
The Spanish predicament is even worse as the new regime comes into force. The conservative government of Mariano Rajoy is grappling with a budget deficit last year of 8.5%, well above the pact's ceiling of 3%, making it virtually impossible to get the deficit down to the target of 4.4% this year.
New economic data once again underlined the scale of the economic downturn facing the eurozone: unemployment jumped to a record high of 10.7% in January, with some 185,000 more workers losing their jobs in the 17-country single currency bloc.
Manufacturing figures, meanwhile, showed activity shrinking for the seventh consecutive month. In Greece, which needs to stabilise its economy to conform to the terms of its latest bailout, manufacturing shrank at its fastest pace since the Markit PMI survey started in 1999 and now stands at a record low.
Senior European officials and diplomats in Brussels, who are now assuming that the left will win France's presidential election in May, ousting Nicolas Sarkozy, predict that the anti-austerity rebellion will intensify. They believe a probable new administration in Paris will push more expansionary policies in the eurozone's second-biggest economy.
In the Netherlands, too, there are growing calls for the terms of the fiscal pact to be ignored – most notably the 3% budget deficit limit. The official Dutch economics analysis office predicted budget deficits of 4.5%, 4.1%, and 3.3% for the next three years, all in breach of the new rules, presenting a dilemma for the minority coalition of liberals and Christian Democrats.
The figures mean the government will need to deliver savings of up to €15bn next year, compared to the €18bn in cuts over four years promised only six months ago.
The Dutch government has been among the strongest advocates of austerity for Greece and other bailed-out countries throughout the crisis and Thursday's figures triggered a certain amount of glee on the debtors' side of the eurozone.
"There may be some schadenfreude," said a senior EU official. "But this is about credibility. The Dutch are the ones who have been insisting on strict fiscal rules. They will have to do something."
While Spain is asking Brussels for more time to put its fiscal house in order, there is no sign of the Dutch doing so.
The new fiscal pact was the price exacted by Germany for agreeing to a second Greek bailout and to the new permanent bailout fund.
While eurozone finance ministers in Brussels failed to fully approve the new Greek deal, they set the ball rolling by posting €35 bn of collateral with the European Central Bank.
But at German insistence, it appeared that the summit, which is formally focused on finding ways to boost EU growth, would not discuss increasing the bailout fund, as demanded by Washington, Beijing, and London.
The permanent fund, the European stability mechanism, is to hold €500bn, but is viewed as an inadequate firewall to stem a bond market attack on, say, Italy.
Merkel, virtually alone in the eurozone, has been resisting intense pressure to increase the firewall capacity, but German media reports on Thursday suggested she would perform a U-turn by the end of the month. "We will not be able to resist this pressure for long," she was quoted as telling cabinet colleagues in reference to urging from Washington and the International Monetary Fund.
In remarks clearly directed at Berlin, the US ambassador to the EU, William Kennard, said yesterday: "It's important that people understand we think Europe has the financial wherewithal to solve this crisis and we are confident that ultimately it will. in Brussels on Thursday .
"Whether it's eurobonds or a bigger firewall, all the markets want is for Europe's governments to collectively stand behind their currency…We have urged a very powerful firewall to be put into place to stem contagion."