Commissioner Rehn takes one last hit

(LUXEMBOURG) - To Olli Rehn, the EU's low-key but hardline economics affairs commissioner, another push against austerity could not have come as much of a surprise.

Rehn, who steps down at the end of the month, has spent five years as the EU's designated figurehead for all things austerity, hailed in several northern states as an enforcer of sound public finances, but loathed in the crisis-hit south as a driver of mass unemployment and recession.

But just before arriving in Luxembourg this week for his 60th and last Eurogroup meeting as commissioner, the austerity line backed by Rehn and imposed by Berlin faced fresh criticism.

Catching many off guard, German economy minister and vice chancellor, the social-democrat Sigmar Gabriel, suggested that economically embattled countries such as Italy and France be offered some latitude in meeting EU rules while they got their finances in order.

Conservative German Chancellor Angela Merkel swiftly and flatly dismissed the idea by her coalition partner, but the message was out and the austerity-versus-growth debate thrust open once more.

Gabriel's remarks "are more than a storm in a tea cup," commented Carsten Brzeski, economist at ING bank, because even the IMF is now suggesting reform to the rules are in order.

"They could be the start of a new debate on growth vs austerity," Brzeski said.

Under the EU's rules, public deficits -- the shortfall between government income and spending -- should not exceed 3.0 percent of annual gross domestic product.

Accumulated debt -- the sum of all those annual deficits -- is supposed to be kept at 60 percent of GDP.

The rules, created in the 1990s, are part of the EU's Stability and Growth Pact and were reinforced during the crisis to empower Rehn's commission with stronger methods of enforcement.

The tougher rules include Brussels oversight of national budgets and potential fines for rule-breakers. They were pushed through by Germany in return for the rescue of crisis-struck countries with tax-payer money.

Defenders of the stricter rules, mostly the EU's richer countries to the north, are wary of reversing course, and suspect the calls to change them are thinly-veiled efforts to make room for renewed public over-spending.

But even the usually fiscally hawkish International Monetary Fund says some changes are needed.

IMF head Christine Lagarde, attending the meetings in Luxembourg to present a report on the eurozone, said the rules were "excessively complicated", rarely met, and subject to a "divergence of interpretation" by member states.

She also threw open the the validity of the EU's often missed deficit and debt thresholds, set during a period of high growth "that has nothing to do with today."

After Merkel's flat rejection, the French and Italian finance ministers denied any intention of calling for changes to the pact, though officials in Rome and Paris openly welcomed the comments by Germany's vice chancellor.

"Rules are rules," said French Finance Minister Michel Sapin and Eurogroup chief Jeroen Dijsselbloem added that all eurozone finance ministers meeting in Luxembourg agreed.

But Finland, Rehn's native country and one that has stressed the need for fiscal discipline, acknowledged in early June that it would also breach the public debt limit for the first time since it joined the EU in 1995.

One floated idea, notably by Italy which is about to take the EU rotating presidency, is a loosening of budget rules to exclude government investment spending when measuring the deficit.

"This is not what we have asked," said Italian Finance Minister Pier Carlo Padoan. Only "existing instruments" would be proposed "to stimulate growth" when Italy assumes the six-month presidency on July 1.

Rehn, an otherwise reserved Finn who holds a doctorate in philosophy from Oxford University, defended the position of his austerity-minded commission and took the IMF criticism in his stride.

The best way forward was to focus on "the existing toolbox", he said. "Concerning our fiscal rules... I would simply say that if they have become more complex (it) is that they have become smarter." he added.