EU hands soccer fan the fiscal scalpel

It does not take a genius to see that the European Union's public finances will need radical surgery in the aftermath of the financial crisis and the hard bit will rather be persuading countries to carry it out.

That looks to be the logic behind Brussels' appointment on Friday of a soccer-loving Finn with a doctorate in international political economy but no experience in economic policy-making to head its monetary affairs arm.

Olli Rehn, EU commissioner for enlargement since 2004, will be economic and monetary affairs commissioner for the next five years — a period when the 27-nation bloc will battle to cut huge budget deficits and debt inflated by the worst economic downturn since Second World War.

"He does not have direct experience of economic policy-making," a Finnish Finance Ministry source said. "But he is a smart guy, and he has done a fairly good job in different Commission positions."

Main challenge

The main challenge for Rehn's predecessor, Spaniard Joaquin Almunia, was the 2005 reform of the EU's budget rules, the Stability and Growth Pact.

Almunia sought to make the rules more flexible for countries running budget gaps above the limit of 3 percent of GDP and yet retain its capping role on government borrowing.

It will be up to Rehn to make sure that flexibility is not abused at a time when Europe needs sound public finances to cope with the budgetary effects of an ageing population that will cut revenues and boost age-related spending.

A senior EU economic policy maker said he was a good choice, and played down any lack of hard economic policy experience.

"This is the commission. They are all politicians and this job requires a good politician," he said.

‘Intelligent'

"He is an extremely intelligent guy, not a macro-economist, but he has exactly the right instincts of fiscal discipline and averting macroeconomic imbalances in the EU," he said. "He is a superb negotiator which will be very good for talks in the G20."

The Commission, the EU executive, is responsible for making sure EU laws are respected by all members — big and small.

Rehn will have to deal with, for example, French reluctance to meet its target of cutting the deficit below 3 per cent by 2013, muddy Greek budget statistics which show ever higher gaps and traditional British disdain for EU advice on how to reduce its own huge shortfall.

The stakes are high because the Commission expects the aggregate budget deficit in the EU to rise to 7.5 per cent of GDP next year from 6.9 per cent seen this year — more than three times the EU limit.

Unless EU members, and especially the 16 countries using the euro, show a clear path how to reverse the unsustainable borrowing trend, they could lose credibility with markets.