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European Union Aims to Put New Muscle into Limiting Deficits; Will it Succeed?

Since 2009, France’s state budget has been breaking the rules. It has been exceeding the European Union’s limit on the size of deficits, which are limited (under the Maastricht Treaty) to 3 percent of gross domestic product unless there are exceptional circumstances. Once in excessive deficit, a country must fulfill a specific timeline agreed, by European finance ministers, for coming back into compliance. Until this week, France's deadline to bring its deficit below 3 per cent of GDP was 2015.

This week, however, the European Commission will announce that the French budget complies with the rules, despite the fact that it does not foresee a deficit below 3 per cent for the years ahead. Even if growth recovers, the French deficit likely will remain above the threshold until the end of this decade.

This announcement is the first application of a new set of rules known as the Two-Pack. This policy has the European Commission issue opinions on countries’ draft budgetary plans, and it tightens monitoring and coordination among euro-area member states on the conduct of their economic policies. One could argue that the French case is a clear failure of European institutions which have in the past not been able to enforce rules.

This would be the reading from a very legalistic point. From a substantial viewpoint however, the French case shows how rules broadly serve as a benchmark for member states, but also how the exact interpretation of these benchmarks remains very flexible to take into account wider circumstances that might justify a higher budget deficit, including political reasons.

This is the typical EU story since the introduction in 1999 of the euro and the Stability and Growth Pact. Among the twenty-eight EU members, only two countries—Estonia and Sweden—have always held their budget deficits below the limit of 3 percent of GDP. Yet no country has ever been sanctioned. So rules, including the reinforced Two-Pack regime, are crucial to enhance coordination and create stronger peer pressure. Still, even this will not force member states to run lower deficits if their governments and national parliaments are not willing to do so.

Since the case of France is the first application of the new rules, the credibility of this new approach is at stake.

There is no doubt that the French economy is not recovering, and an additional tightening of fiscal policy would negatively affect the already weak economic growth. However, France is currently just buying time. Its government is avoiding investing the political capital needed to more ambitiously cut its budget expenditures. But sooner or later the French deficit has to be lowered, and this can happen either through lower expenditures and higher revenues or by pushing economic growth.

France should use this time to fully implement reforms that can make its economy more competitive. According to a recent study by the OECD, economic reforms announced or undertaken may generate additional 0.3 percent GDP growth every year for the next five years. This is not a lot, but it will make the difference between a growing public debt and a stable one.  

As European partners prepare to let France's excessive deficit run for as long as ten years, they should ask for a set of deliverables in much more stringent ways. This could take the form of stricter monitoring, coupled with public recommendations on specific reforms underway, to create sufficient pressure to execute these reforms. More specifically, monitoring could include a regular, on-site technical mission of the European Commission and reviews with measurable indicators on the implementation of reforms. 

However, if EU institutions decide that a purely generic commitment is sufficient in France’s case, then there is a great risk that other countries will follow, running high deficits with weak commitments, and the new framework will rapidly lose any credibility.

 Andrea Montanino is the director of the Atlantic Council’s Global Business and Economics Program. He has served as an executive director of the International Monetary Fund and a senior economist at the European Commission.

Ukraine’s Friends Plan a Donor Conference in February; Is That Soon Enough?

On Ukraine, the economists are declaring an emergency. Ukraine is bleeding cash in its war against Russian and Russian-proxy forces in the Donbas region. With its industrial heartland shattered by the war, the country’s economy is shriveling. And the warnings from economists are growing that Ukraine will need a big increase—and quickly—in international financial support, if it is to avoid an economic collapse.

“Ukraine is at risk of a financial meltdown,” economist Anders Aslund wrote last week on his blog at the Peterson Institute for International Economics. “Presumably it would be reminiscent of the Russian financial crash of August 1998—with default, high inflation, a frozen banking system, falling output, and panic.”

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Atlantic Council’s Matthew Kroenig on the Extension of Nonproliferation Talks

As Iran and six other nations announced a seven-month extension of their effort to reach a deal to limit the Iranian nuclear program, the Atlantic Council’s Matthew Kroenig said Iran will pose a nonproliferation threat even if a deal is struck.

Kroenig, a nonresident senior fellow with the Brent Scowcroft Center on International Security, said the US and its allies must increase their pressure on Tehran to reach an agreement, but that a deal along the lines of the current negotiation will not be comprehensive. In an interview, Kroenig also discussed his brief—Mitigating the Security Risks Posed by a Near-Nuclear Iran—issued by the Council last week.

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Vice President Joe Biden and Turkish Prime Minister Ahmet Davutoğlu spoke at a special closing session of the 2014 Atlantic Council Energy and Economic Summit on the topic of European energy security. In the shadow of Russia's annexation of Crimea and military intervention in Ukraine, Biden spoke of the need for Europe to diversify its energy sources.  “Now, now, now is the time to act," Biden said. "What’s happening in Ukraine only serves to underscore this.”

Biden concluded by saying:  “Energy can and should serve as a tool for cooperation, for stability, for security, and prosperity."

Click here to read the full event report and to watch video of Biden and Davutoğlu's remarks.

Atlantic Council's Gopalaswamy Comments

President Barack Obama will travel to India in January, becoming the first US president to visit the country twice while in office. Bharath Gopalaswamy, deputy director of the Atlantic Council’s South Asia Center, tells Ashish Kumar Sen why this visit is important—and notably how it will be seen by India’s main rivals, China and Pakistan.

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Coinciding with the 25th anniversary of the fall of the Berlin Wall, the Atlantic Council on November 13 unveiled a three-ton segment of the Wall bearing the signatures of individuals who played historic roles in bringing the Cold War to a successful end.

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When Hitler Invaded Poland, No One Demanded Polish Reforms Before Offering Help. Why Is It the Reverse for Ukraine?

“September 3, 1939 – British and French commentators and officials said today that it could no longer be denied that Hitler was invading Poland and that the Nazi forces represented the most serious threat to the existence of that country, but they said that Warsaw could not reasonably expect allied assistance unless it carried out massive reforms first.”

That story, of course, never happened. …  No one suggested that Poland needed reforms before defense because they recognized that if Poland did not exist, it could not reform. (The exception was those in London and Paris with links to the Communist Party who followed the Kremlin line even when Stalin was an ally of Hitler, as was then the case.)

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Future of US Economy Depends on Getting Immigration Right

After months
– and even years – of anticipation, President Barack Obama has provided an imperfect solution for nearly half the country’s unauthorized immigrants. The bold decision to wield his executive authority will extend legal status to up to 5 million unauthorized immigrants; make it easier for high-skilled workers to stay; and strengthen security along the border with Mexico. It has been a long time coming. His actions will affect many more unauthorized immigrants than even President Reagan's 1986 Immigration Reform and Control Act.

The president has provided a temporary solution to a permanent problem. That permanent problem is our broken immigration system.

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Opinion leaders from politics, media, academia, and the corporate world convened in Istanbul this morning for two days of talks on how governments and companies manage emerging risks and uncertainty in today’s turbulent times.

The sixth annual Energy & Economic Summit began with a welcome by Atlantic Council Chairman Jon M. Huntsman, Jr., President and CEO Frederick Kempe, Ambassador of the United States to the Republic of TurkeyJohn Bass, and Summit Director Orhan Taner.

Keynote speakers at the opening session at the Grand Tarabya Hotel on the Bosphorus were US Energy SecretaryErnest Moniz, EU Commissioner for Climate Action and Energy Miguel Arias Cañete, and Turkish Minister of Energy and Natural Resources Taner Yıldız.

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Deadline in Talks Likely to Be Extended, Says Former US Ambassador Thomas Pickering

As international negotiators approach next week’s self-imposed deadline for reaching a compromise to let Iran pursue a nuclear program, US and French former officials told Atlantic Council forums this week that a deal could offer new advantages in the Middle East.

An agreement could create an opportunity for a US-Iranian “open relationship” on confronting militant threats in Iraq and Afghanistan, Ambassador Thomas Pickering told a November 19 forum at the Council in Washington. “For the first time, the United States and Iran have gotten down to the wire, along with our European and Russian and Chinese colleagues, to something that could in one way or another generate, if not a sea change, certainly a major shift in the situation in the region,” said Pickering, a former undersecretary of state for political affairs.

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