Ahead of Wednesday’s meeting of the EU’s 27 commissioners, Spain and Portugal looked to be headed for the eurozone’s version of politically embarrassing fiscal purgatory.
There was no question that the Iberian duo’s budget deficits were in blatant breach of the single currency zone’s rules. Momentum was growing for the Commission to impose, for the first time ever, a fine totaling in the millions of euros. Even Jean-Claude Juncker, the Commission chief, had seemingly changed his previously skeptical views on sanctions, pushing his colleagues in recent weeks to enforce the rules and shore up Brussels’ credibility on eurozone governance.
Then salvation arrived from an unlikely source: Wolfgang Schäuble.
The German finance minister, curmudgeonly fiscal hawk and scourge of spendthrift southern Europeans, broke with public type in a concerted, last-minute campaign to stop the sanctions, according to people familiar with his actions. Over the past weeks and days, Schäuble worked the phones and used personal encounters, pressing commissioners on the fence, mostly from his own center-right political block, to cancel the threatened fine.
The behind-the-scenes intervention was driven by political considerations particular to this moment that trumped Schäuble’s long-standing demands for the eurozone nations to keep their budgets in order and abide by commonly agreed rules.
By the time the so-called College of Commissioners gathered mid-morning on Wednesday, the sentiment in the room had shifted away from coming down on Spain and Portugal. “That is having an impact,” a source in the room wrote during the deliberations, referring to Schäuble’s intervention.
“Something happened overnight,” said another EU official.
“Only a few dared to stick out their heads” to back sanctions, said another participant in the College meeting.
Two vice presidents, Valdis Dombrovskis and Jyrki Katainen, and the German Commissioner Günther Oettinger and his Swedish peer Cecilia Malmström were among those who supported fines. Vice President Frans Timmermans, Commissioner Pierre Moscovici and the commissioners from Portugal and Spain, Carlos Moedas and Miguel Arias Cañete, argued loudly against it.
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As the consensus grew against a fine, Juncker urged the participants to make clear to the outside world why Brussels ducked, once again, imposing sanctions on rule breakers. “We must not be more Catholic than the Pope, but please make it known that the Pope wanted a fine of zero,” Juncker said, speaking in French at the closed-door meeting, according to a source in the room. In this analogy, the Pope is Schäuble.
Early afternoon, the Commission announced the decision, which was welcomed with relief by Madrid and Lisbon and criticized for undermining the credibility of the euro. Speaking to reporters afterward, Moscovici suggested political considerations carried the day: “Discussions with many finance ministers make us think there is a political consensus of not fining Spain and Portugal.”
One finance minister mattered more than others. The night before, Juncker had called Spain’s Acting Prime Minister, Mariano Rajoy, and his Portuguese counterpart António Costa, according to the president’s aides. “Both knew that Schäuble had argued for a cancellation of the fines,” during the meeting of the G20 finance ministers in China last weekend, said an official who was briefed on the conversations.
The reversal of roles — with Schäuble, who had pushed the hardest line during the Greek debt crisis, calling for clemency and the deficit dove Juncker asking for overdue discipline of the Iberians — struck a discordant note in Brussels.
Officials pointed to various political reasons for Schäuble’s move. Primarily, the de facto number two in Germany’s government doesn’t want to hurt an ally in Mariano Rajoy, the center-right Spanish leader who is struggling to put together a government after last month’s elections. With France and Italy in the hands of the Left, Germany’s CDU-led coalition prefers to see a fellow conservative take power in the eurozone’s fourth-largest economy. During his conversations at the G20 in China, Schäuble stressed the need for “political stability” in southwestern Europe, according to someone familiar with the conversation. Portugal’s leftist government got a free ride on the Schäuble train.
Schäuble also has for years fought to put the Commission in its place on economic governance decisions, making clear that national capitals take precedence in the pecking order. In that light, Juncker’s push on sanctions, if successful, would have put EU finance ministers on the spot to approve or change the Commission’s decision. Schäuble prefers to give than take orders and influence decisions before they are made, as happened with his intervention this week.
As it happens, by fighting to stop the sanctions, Schäuble has in the public eye undermined the credibility of the Stability and Growth Pact rules he did so much to shape.
The German finance minister backed the decision on Wednesday. “After a first examination, the Commission’s reasoning as a whole seems plausible,” a spokesman in Berlin said. The spokesman declined to comment on Schäuble’s private conversations.
For Juncker, who has played the EU political game nearly as long as the 73-year-old Schäuble, his sudden support for sanctions, if only relatively token ones, gave him cover from critics who stood ready to accuse him of going soft. By backing sanctions, he could have shown a good faith effort to enforce the rules and punt the hard decision to the finance ministers.
Early on Wednesday morning, he met with the commissioners most directly responsible for economic matters, Dombrovskis and Moscovici, to come up with a joint proposal for the College. They couldn’t agree. Dombrovskis and Moscovici were on opposing sides. “All was left open for the College debate,” one source said, calling it “civilized but lively.”
Juncker himself wasn’t very outspoken in the College meeting itself, according to participants.
But in summing up the decision, Juncker made sure to put the ultimate responsibility for the decision on “the Pope,” in his words, at the finance ministry in Berlin.