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09/12/2016

Brussels demands more ambitious reforms from France

Euro & Finance

Brussels demands more ambitious reforms from France

The European Commission is expecting to receive a new programme of structural reforms from Paris by April, despite the recent adoption of the Macron bill. EurActiv France reports

France has obtained a further extension of two years, until 2017, to bring its public deficit back under 3%. In return, Paris must commit to rapid and ambitious economic reforms, the European Commission said on 25 February.

Announcing its decisions on the national budgets of France, Italy and Belgium, three countries playing a delicate game with the rules of the Stability and Growth Pact, the Commission placed France among the worst offenders in terms of macroeconomic imbalance, but gave the country more time to reduce its public deficit.

Reforms on the cards

The message is clear: Paris’s structural reforms, even the Macron economic bill, are not sufficient. Pierre Moscovici, the French Commissioner in charge of Economic and Financial Affairs, said, “We have raised France up one step on the macroeconomic imbalance scale.” France is now on the fifth out of six possible rungs on this scale.

>> Read: Italy and France hit back at Merkel over economic reforms call

“France has announced several reforms that go in the right direction […] We expect Paris to announce an ambitious and more detailed programme of national reforms in April,” France’s former Minister of the Economy said.

The French proposals will be reevaluated in May, but without improvement, the Commission will be forced to move the procedure to their next stage: the “corrective” reform plan.

A sizeable challenge

The challenge is a big one for the French government, which has just succeeded in forcing the Macron bill through parliament, in a bid to relaunch the economy. Paris will now have to implement further-reaching reforms with an ever-weakening government majority.

>> Read: French attempt to ‘liberate’ the economy ends up adding new regulation

“It did not escape me that the vote on the Macron bill in parliament was not a simple one,” said Pierre Moscovici.

Budget deficit

Paris has been fortunate to receive another two year extension on its deadline to bring the budget deficit under 3%, in spite of the Commission’s new demands.

Valdis Dombrovskis, the Commission Vice-President for the Euro, said “We will propose a new recommendation to the Council to bring the target date for France from 2015 to 2017.”

In 2013 the country had already been given a two year extension to its budget deficit reduction objective.

Show of resolution

The European Executive has been careful to put on an outward show of resolution, in order to avoid damaging the credibility of the Stability and Growth Pact.

“For 2015 we recommend a structural effort of 0.5% of GDP,” Valdis Dombrovskis explained. France had already committed to reducing its deficit by 0.3%, but will have to find a further 4 billion euros in savings to reach the Commission’s target. Several northern European countries feel the EU should take a harder line on the question of French debt.

>> Read: France calls for more time to reduce its deficit (in French)

“The structural budgetary efforts demanded of France absolutely must be respected,” the French Commissioner stated. “It is important for the credibility of the Commission, but also of France,” he added.

Finance Minister Michel Sapin responded immediately that “France will respect its commitment to these adjustments in 2015.”

The Commission will closely follow French progress on the matter. Valdis Dombrovskis said, “We will carry out a new evaluation of this objective three months after the Council’s adoption of the new recommendation.”

Other problem countries

France is far from the only EU member state whose budget has attracted the attention of the Commission. A total of 16 member states have been called to order for macroeconomic imbalance, including Germany, for its lack of investment in the public and private sectors. 

Background

The excessive deficit procedure is laid out in article 126 of the treaty on the functioning of the European Union. This article obliges the member states to avoid excessive deficits in national budgets.

The Commission evaluates the data and the Council decides what constitutes an excessive deficit. The Commission puts together a report, taking into account all the factors (economic conditions, reforms, etc.) that may be relevant for deciding whether the deficit is excessive.

If the Council decides that a member state's deficit is excessive, it begins by making appropriate recommendations. The state concerned then has a precise timescale in which to bring the situation under control. If the state does not conform to the recommendations, the Council gives them formal notice to take measures to reduce the deficit. If required, the Council is able to hand out sanctions or fines, or to invite the European Investment Bank to review its lending policy regarding the state concerned.

A deficit is considered excessive if it is above 3% of GDP. A 1997 Council regulation clarifies and accelerates the excessive deficit procedure.