Looking for Mr. Euro

Long Europe’s behind-the-scenes fixer, Jean-Claude Juncker wants to be the single voice of the EU’s single currency. But can he persuade Berlin and Paris to toe his line?

European Union leaders were drawing up the ground rules for their single currency back in 1996 when Germany and France deadlocked on the need for tight fiscal restraints. ThenGerman chancellor Helmut Kohl insisted on setting strict limits on budget deficits, with automatic sanctions for violators; French President Jacques Chirac argued for a softer approach that would allow governments to stimulate growth in their economies.

Enter Jean-Claude Juncker. As Luxembourg’s prime minister and Finance minister, Juncker knew the issues and the players inside and out. More important, he had the knack for political compromise that comes naturally in his tiny country, which is wedged between Germany and France and needs good relations with its big neighbors to thrive.

At an EU summit meeting in Dublin in December 1996, Juncker brokered a deal between Kohl and Chirac that gave rise to the Stability and Growth Pact: Countries adopting the euro would agree to keep their deficits down, but fines on rule-breakers would have to be approved by finance ministers rather than triggered automatically.

More than eight years later, the issue of budgetary rules continues to vex EU leaders, but now Germany and France are on the same side of the debate. For the past three years, both countries have violated the Stability Pact by running budget deficits in excess of 3 percent of gross domestic product, and both want the rules relaxed. Several smaller states, led by the Netherlands and Austria, which have taken a tough line on spending to abide by the pact, strongly oppose attempts to water it down.

The adversaries may have changed over the years, but once again it is Jean-Claude Juncker, now serving as president of the Euro Group, the top policymaking body for the 12 countries that use the single currency, who stands in the middle of the argument, trying to reconcile the two sides.

His task won’t be easy. Repeated violations of the deficit ceiling have made a mockery of the Stability Pact. True, that hasn’t exacted an economic toll on the euro zone so far -- Europe’s budget deficits are smaller than the U.S’s, and subdued inflation, combined with low interest rates around the world, has allowed the European Central Bank to maintain its key short-term rate at an all-time low of 2 percent. But higher deficits do impose a cost in the long run, asserts Daniel Gros, director of the Centre for European Policy Studies in Brussels. “An extra deficit of 1 percent of gross domestic product a year over 20 years leads to a much higher debt-to-GDP ratio,” he says. The failure of Euro Group policymakers to abide by their own rules has sapped their credibility, and attempts to revise the pact have aggravated the group’s divisions, making it harder for members to address other urgent issues.

“To have our broader economic policy agenda constantly overshadowed by the Stability Pact debate is bad for Europe -- it’s bad for the economic optimism of our people,” says one senior EU official.

Juncker, after all, faces plenty of equally pressing challenges. The EU’s so-called Lisbon agenda of structural economic reforms, aimed at raising the bloc’s competitiveness and rate of growth, has stalled as governments have shied away from making tough political decisions on labor regulations and tax and welfare reform. And the euro’s strength against the dollar threatens to diminish the already-modest growth prospects of the euro zone, the recent recovery of the U.S. currency notwithstanding.

These problems have frustrated the EU since the launch of the single currency six years ago, and no individual is going to resolve them overnight. But Juncker’s proven diplomatic abilities and his experience as Europe’s longest-serving prime minister (since 1995) -- as well as its longest-tenured finance minister (since 1989) -- offer the best opportunity to move policy in the right direction and give the world’s No. 2 currency the leadership role it deserves.

“His skills and his experience are really needed in this situation,” says one senior EU official who has worked with Juncker for more than a decade. “He’s a true European. He would like to make this fledgling currency a success.”

That view is echoed by Robert Goebbels, a Socialist member of the European Parliament and former Luxembourg Economic Affairs minister who served in Juncker’s cabinet in the 1990s. “The advantage of being a Luxembourger is that we are no threat to anybody,” Goebbels says. “When he tries to adjust the Stability and Growth Pact, he doesn’t fight for his national interest. He is fighting for the European interest.” And that interest, Goebbels believes, is to achieve a consistent set of rules that apply equally to all euro countries -- with no special treatment for France and Germany -- and that foster growth and employment.

EU governments acknowledged the need for stronger and more-coherent economic leadership in September, when they agreed to create a two-year presidency for the Euro Group, which is made up of the finance ministers of the 12 euro countries. Previously, the job had been little more than a caretaker position, rotated every six months. Juncker’s unparalleled résumé made him the obvious choice to serve the first two-year term, which began in January.

That month at his first Euro Group meeting in Brussels, he showed his willingness to fight for the wider EU interest. He set a tight deadline for revising the Stability Pact -- in time for the next EU summit meeting, to be held March 2223. He also issued a blunt rebuke to German Chancellor Gerhard Schröder, who on the day of the Euro Group meeting had publicly called for the return of enforcement powers from the European Commission, the EU executive agency that has been pressing Berlin to tighten its fiscal belt, to the national capitals -- which would effectively dismantle the pact.

“He is not in charge of the European economy. He is not a head of state, either. He’s just a head of government,” Juncker said at a news conference after the meeting. “I pointed out to Germany, as did others, that I would be prepared at no stage to propose such a measure.”

Juncker’s goals extend beyond mere deficit limits. He wants euro-zone governments to coordinate their tax, spending and structural reform policies to reinforce growth across the bloc. In particular, he wants finance ministers to agree on common policy goals each spring before national governments begin drafting their annual budgets. He contends that it makes little sense for one country to consider income tax cuts in a bid to spur growth, if others are tightening fiscal policy. “There is an undeniable need for greater coordination of national policies. We need to achieve consensus on the broad guidelines of fiscal and structural policies,” Juncker wrote in a January essay for the Brussels-based European Policy Centre that outlined the goals for his presidency.

Juncker also wants to forge a coherent exchange rate policy within the Euro Group. This has so far proved elusive because of the mistrust that exists between finance ministries and the European Central Bank, which share responsibility for the task, and the tendency of national officials to make declarations about currency movements that they can’t back up with policy initiatives. In recent months, for example, Schröder and Caio Koch-Weser, Germany’s state secretary for International Finance, have complained that the euro has been bearing the full brunt of the dollar’s weakness, and they have urged China to revalue the renminbi. But euro-area governments have failed to agree on a common position on exchange rates, much less managed to persuade the ECB to endorse such a stance. Juncker’s desire to fill that gap will be helped by the fact that he now represents the euro zone alongside ECB president Jean-Claude Trichet at meetings of the Group of Seven countries, beginning last month with the G-7 meeting of finance ministers and central bank governors in London.

“It is only when member states speak with a single voice that they will reap the full advantages of the common currency,” Juncker wrote in his essay for the European Policy Centre.

Most economic and political analysts express support for Juncker’s goals -- the euro-zone economy can only benefit from improved policy coordination, they say -- but they remain skeptical of his ability to fare any better at achieving them than his predecessors did. When Belgium’s Finance minister, Didier Reynders, presided over the Euro Group back in 2001, he sought to coordinate fiscal policies before national governments drafted their budgets, but he was rebuffed by his fellow finance ministers. Similarly, Reynders’s efforts to develop closer cooperation between finance ministers and the ECB met with a flat rejection by the central bank, which considers such cooperation an infringement of its monetary policy independence.

Jim O’Neill, London-based head of global economic research at Goldman, Sachs & Co., supports a stronger Euro Group presidency but doubts that it will significantly improve policy coordination or presentation: “Conceptually, it’s a good thing. Do the markets notice? No.” O’Neill contends that if the euro’s strength resumes and governments need to consider intervention to stem its rise, investors and traders will look to Trichet or the German and French finance ministers, Hans Eichel and Thierry Breton, rather than to Juncker for signals.

JUNCKER’S PRO-EUROPEAN CONVICTIONS arise from his own family experience: During World War II his father was forced into the German army and sent to the Russian front. (He later became a steelworker and union activist.) Like most European politicians with any wartime experience, direct or indirect, Juncker regards the EU as a bastion of peace and stability and a guarantee against future European wars. Those convictions were reinforced when he studied law at the University of Strasbourg, in the border city that symbolizes France and Germany’s postwar reconciliation.

After graduating with a master’s degree in 1979, Juncker honed his political skills by going to work as the parliamentary secretary of the Christian Social Party, Luxembourg’s ruling center-right party. His energy, ambition and grasp of complex issues attracted the attention of thenprime minister Pierre Werner, the man who drew up the blueprint for a single European currency in 1970. Impressed with Juncker’s poise and promise, Werner in 1982 made him secretary of state for Labor and Social Security, a junior cabinet position, at age 27, even though he didn’t hold a seat in Parliament. Juncker duly ran for and won election to Parliament in 1984 and was appointed to two senior posts: Labor minister and Budget minister. In 1989 he was reelected to Parliament and again named to two ministerial posts, Finance and Labor, by Jacques Santer, the new prime minister.

Juncker was actively involved in the negotiations that produced the 1992 Maastricht Treaty on European Union, which laid out the rules and timetable for launching the euro. Crucially, he proposed the opt-out clause for the U.K. at an informal meeting of finance ministers he chaired in Luxembourg in May 1991. That clause averted the threat of a British veto of the treaty by allowing the U.K. to stay out of monetary union. At another finance ministers’ meeting that year, he gained further firsthand experience in forging difficult compromises when he led negotiations on harmonizing value-added tax rates. It was a particularly thorny issue -- each EU member had a host of exemptions or low VAT rates on everything from food to books to children’s clothing -- but Juncker persevered, putting forth numerous proposals that steadily narrowed the national differences. “In the end he got everybody on board,” recalls Luxembourg European Parliament member Goebbels.

Juncker’s biggest accomplishments came after he was appointed prime minister in 1995, succeeding Santer, who left to take on the presidency of the European Commission. In 1996 he played meditator between Kohl and Chirac over the EU’s proposed fiscal rules. Then two years later he forged another compromise between the German and French leaders over the ECB’s leadership. That deal handed the post to Germany’s candidate, Wim Duisenberg, with the understanding that he would give way to Frenchman Trichet midway through his eight-year term. Such diplomacy normally would have been handled by the president of the European Council, which consists of the heads of EU governments -- then Tony Blair -- but the British prime minister was in no position to intervene, because of his country’s refusal to join the euro zone.

For France and Germany, Juncker is a natural go-between. Like virtually all of his countrymen, he speaks fluent French, Luxembourg’s official language, which is taught to children in schools from the age of six, as well as German, which is taught from age seven. (He also speaks Letzeburgish, the local Germanic dialect.) He has said that if he hadn’t taken up a career in politics, he would have liked to be a German teacher. “He has more of a feeling for the German language. He loves it,” Goebbels says.

Juncker also knows the importance of bridging the crucial but often overlooked divide between the EU’s big and small states. The economic and political clout enjoyed by France and Germany is often resented and feared by smaller states, which look to EU institutions like the Brussels-based European Commission to safeguard their interests. It’s no surprise that the EU has taken a harder line on the excesssive deficits run by small states like Portugal and Greece than it has toward those of Germany and France. That explains why countries like Austria, Finland and the Netherlands have been the most outspoken in demanding the same budgetary rigor from Paris and Berlin. After the Euro Group meeting in January, Karl-Heinz Grasser, Austria’s Finance minister, bluntly criticized French and German proposals to exempt certain government spending, such as aid for research, from deficit calculations. “That would spell the end of a serious, solid fiscal policy,” he said. “Spending is spending.”

To be sure, the Stability Pact has always been a flawed mechanism, designed mainly to reassure the Germans that they wouldn’t be sharing a currency with profligate neighbors. The 3 percent deficit limit is an arbitrary figure, and the idea of imposing fines on countries running excessive deficits has proven to be politically unrealistic. The pact’s dwindling credibility was shattered in November 2003 when Paris and Berlin teamed up to persuade EU finance ministers to reject a Commission proposal that would have required France and Germany to reduce their deficits quickly.

Yet for all its weaknesses, the pact has exerted a restraining influence on governments. Despite violating the limits, Paris and Berlin have kept their deficits close to the ceiling: Both deficits are estimated to have been slightly more than 3.5 percent of GDP last year. That’s a far cry from the U.S., which is running a deficit of nearly 5 percent of GDP. Deutsche Bank predicts that in 2005, France will reduce its deficit to 2.9 percent of GDP and Germany to 3.3 percent.

“If you want to keep interest rates reasonably low for the private sector to borrow, you need to make sure that deficits don’t grow by leaps and bounds,” says Thomas Mayer, Deutsche Bank’s chief European economist. The constant arguing at the Commission between deficit violators like Germany and France and deficit hard-liners like the Netherlands has sapped confidence in the ability of EU governments to manage the euro-area economy, says Mayer. “Markets are looking to Juncker to get the Stability Pact resolved,” he adds.

To do that, Juncker is drawing heavily on a Commission proposal from last September that suggests a number of measures to ease the pact’s strictures. The proposal would allow countries to temporarily exceed the deficit limit during periods of prolonged slow growth. Currently, the pact provides exceptions for severe recessions, but the Commission believes that the sluggish growth that Germany has experienced over the past four years can have just as much cumulative negative impact on its economy as an outright recession.

The Commission also wants to put more emphasis on government debt levels when judging a country’s deficit. Low-debt countries would be given more time to rein in their deficits if they exceeded the 3 percent limit, and they would be allowed to run modest deficits rather than aim for balanced budgets. The Commission already is showing flexibility on the timetable for action, recommending last month that Greece be given an extra year -- until 2006 -- to get its deficit back under 3 percent of GDP. The Greek deficit ballooned to 5.5 percent last year because of massive spending on the Olympic Games.

Even more important than providing greater leniency in treating deficits during sluggish periods, Juncker says, is to prevent problems from arising by strengthening budgetary discipline during good economic times. Many EU officials believe the bloc could have avoided its recent deficit woes if governments had generated significant surpluses in 1999 and 2000, when their economies were booming.

For Juncker, the key to stronger discipline is closer coordination: Finance ministers in the Euro Group should agree on the economic outlook and broad policy needs each spring before drawing up their national budgets. He wants the group to exercise peer support rather than peer pressure, encouraging good fiscal policy rather than sanctioning bad. “It is not about changing rules but changing behavior,” he wrote in the European Policy Centre essay.

Juncker’s other major goal is to give the euro zone a stronger voice in international financial affairs, including exchange rate policy. It’s hard to see how he could do anything but improve on the bloc’s record. Although several EU leaders and finance ministers have voiced alarm over the euro’s rise against the dollar in recent months and have called for China to revalue its currency, their comments were not coordinated, and the Euro Group has never seriously discussed intervening in foreign exchange markets. Euro-area politicians performed even worse in 2001 and 2002, when their discordant comments and open bickering with the ECB contributed to the currency’s decline to record lows.

The dollar’s recent recovery has taken some of the sting out of the debate, but even so, the euro’s appreciation over the past year is likely to hinder growth in 2005. Goldman Sachs’ O’Neill sees the euro-area economy growing by just 1.5 percent this year, down from 1.8 percent in 2004.

Juncker has hinted at a willingness to use the bloc’s clout in foreign exchange markets. “The euro zone might not be able to stop a country from seeking competitive advantages through exchange rate policies, but it should make sure that these advantages only come at an appropriate price,” he wrote in his recent essay. If Juncker needs to back up his talk, it helps that he has a close working relationship with the ECB’s Trichet. The two men got to know each other well during the Maastricht Treaty negotiations, when Trichet was a senior French Treasury official.

In coming months Juncker will face an early test of his hoped-for unified voice: the issue of debt relief and aid for developing countries. European governments put forth rival proposals at the recent G-7 meeting in London, with U.K. Chancellor of the Exchequer Gordon Brown offering a plan to securitize future aid budgets from industrialized countries to increase assistance to poor nations, while France and Germany proposed a so-called solidarity tax on either aviation fuel or airplane tickets to finance AIDS prevention and other health initiatives in Africa.

Juncker expressed his determination to get European agreement on an aviation tax. “The day the EU is making its position clear, then other participants in the world will be under such pressure from public opinion that they will be joining this solidarity taxation,” he declared.

George W. Bush’s administration isn’t keen on raising taxes, to say the least. Was Juncker’s argument in favor of the aviation tax persuasive? “Not at all,” says Randal Quarles, assistant U.S. Treasury secretary for international affairs. Even some European officials balked at the idea of the bloc going ahead with a tax on a global industry like aviation. “We are in favor of aid and debt relief, but a country should decide on its own how it wants to finance aid and debt relief,” says William Lelieveldt, a spokesman for the Dutch Finance Ministry.

Clearly, Juncker has an uphill struggle in his effort to instill some unity of purpose in the Euro Group. The national reflexes of European governments, ingrained over centuries, don’t give way easily to collective decision making in favor of a six-year-old currency. The Luxembourger acknowledges as much, saying he will consider himself successful if over the next two years he can persuade governments to take the first tentative steps toward common positions on budgetary and economic policies.

“It will still only be a beginning, but I am confident it will be a beginning for the better,” he says. After years of grandiose rhetoric and unfulfilled promise, that sort of realistic vision from a proven political fixer is just what the euro zone needs.

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