How Germany and France will fix the EU Budget?

Germany and France are secretly discussing a deal to enable the European Commission to approve Paris’s draft 2015 budget even though it breaks past deficit-cutting commitments, German weekly Der Spiegel said yesterday.

The two governments are working on a written agreement under which France will provide the Commission with a detailed roadmap for deficit reduction and structural reform, the weekly reported, without naming its source.

In return, Germany would overlook France’s repeated flouting of its pledge to bring its budget deficit inside the eurozone’s 3% of national output ceiling and oppose any sanctions that the European Commission might propose.

Berlin played down the report, with a German government official saying it was wrong and that there was no agreement.

France presented its contested draft 2015 budget to Brussels on Wednesday and risks becoming the first eurozone country to have its fiscal plan rejected under new rules which could eventually lead to Paris having to pay fines.

Berlin, despite its strong advocacy of fiscal discipline, is not keen to trigger a full blown clash between the eurozone heavyweights, Der Spiegel reported.

One high-ranking member of the German government was quoted as saying official rejection of the French budget by the Commission would “massively hurt German-French relations”.

At the same time growing evidence of economic stagnation in the single currency area has increased pressure on German Chancellor Angela Merkel to take a less rigid stance.

However, Berlin politicians argue in public that it is not up to the two capitals to strike a deal on behalf of the Commission. “The plans for France’s budget is with the European Commission,” said a finance ministry spokesman. “It must evaluate the plans and then make a decision.” France’s budget ministry declined to comment.

At a joint news conference in Berlin earlier this week the foreign ministers of both countries said there was no agreement between France and Germany for the eventuality that the Commission would reject the budget.

France argues that austerity measures would be counter-productive due to weak growth and it needs two more years to get to grips with its deficit.

France’s budget and economy ministers meet Germany’s finance and economy ministers in Berlin today. The two countries’ economy ministers have already asked experts to come up with reform recommendations for both countries.

French Foreign Minister Laurent Fabius said this week the structural deficit, which is adjusted for economic fluctuations, would next year be at its lowest level for 14 years, suggesting the Commission might want to focus more on that.

Meanwhile German Finance Minister Wolfgang Schaeuble told a newspaper yesterday that he wanted to increase investment spending and improve competitiveness in Europe’s biggest economy but not at the expense of achieving a balanced budget next year.

A raft of gloomy economic data and expectations of a slowdown in German growth has contributed to jitters on world markets and Schaeuble is under pressure to spend on roads, railways, broadband networks and energy grids to help growth.

In an interview with the Welt am Sonntag, Schaeuble said criticism of the government on insufficient investment or lacking competitiveness was justified, but that Berlin was working on these at both the national and European levels.

“We must invest more and improve our competitiveness. We must get to work on this—quickly and in a concrete way,” Schaeuble told the paper.

“It will not all happen overnight. But we must work on certain things now, like the European digital union, the energy union or the sustainable maintaining of our infrastructure.”

Hit by the effect of crises abroad, a weak eurozone and limp domestic demand, Germany has slashed its growth forecasts to 1.2% in 2014 from 1.8% and to 1.3% in 2015 from 2.0%.

But Schaeuble, who is known for his tough line on budget discipline, insisted Germany would not achieve growth on credit and that he still expected to reach a balanced budget next year for the first time since 1969.