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03/12/2016

EU in last-ditch talks with Italy and France on 2015 budget changes

Euro & Finance

EU in last-ditch talks with Italy and France on 2015 budget changes

Matteo Renzi (left) and François Hollande [Palazzo Chigi/Flickr]

The European Commission is discussing changes with Italy and France to their 2015 draft budgets to avoid having to send back the plans that break European Union rules, EU officials said on Wednesday (22 October).

Eurozone countries submitted draft budgets to the Commission on Oct. 15 to check whether they meet EU regulations, under powers ceded to the EU’s executive arm last year as a result of the euro zone debt crisis.

The Commission had one week, until Wednesday, to raise questions and has done so with Italy and France – the currency bloc’s No. 2 and No. 3 economies.

Both have pencilled in a much smaller reduction in 2015 in their structural budget deficit – the budget gap measure that is independent of the pace of economic growth – than they had agreed with EU finance ministers and under EU rules.

Talks between the Commission and national governments do not necessarily mean the draft budget plans will be sent back but concessions would need to be made on both sides, one EU official said.

“To avoid a rejection of their drafts, Italy and France will have to come up with an extra effort in 2015 and the Commission will have to use the flexibility of the rules to the full,” he said.

A second official confirmed that no decision to send back budgets had been taken yet, noting the assessment of the plans was still under way.

“There is still a week to go before that decision (to send back the draft budget) has to be taken,” he said.

The Commission and many eurozone countries are keen to show that the recently sharpened EU budget rules have to be respected by all to keep investor confidence in euro zone fiscal policy and prevent the possibility of another debt crisis.

France and Italy face acute embarrassment, especially at a time of rising anti-EU sentiment, if their drafts are rejected, and the EU is in no rush to do that.

“It is the opposite. Everything is being done to avoid sending the draft budget plans by the end of October. But it may not protect France and Italy from an escalation of the disciplinary procedure at a later stage,” the first official said.

Background

With an annual deficit of 4.1% of GDP in 2013, France has exceeded the 3% budgetary limits enshrined in the EU treaties.

The European Commission launched measures to deal with excessive deficit and gave France an extra two years to reduce its public deficit to 3%.

In exchange, France was expected to table structural reform plans to reduce their deficits in the long term.

>> Read: Barroso urges ‘credible reforms’ in France in return for deficit grace period

France, whose economy barely grew over the last two years, is an example of the difficulty facing many governments, implementing unpopular structural reforms of pensions or labour laws and keeping a tight rein on public spending.

The Commission believes t it will be necessary to reform the labour market and pensions in order to "unlock the growth that France so badly needs.”

It also expects France to open up its electricity and rail markets, which are currently dominated by former state monopolies EDF and SNCF, the energy and rail companies.

>> Read: Brussels tells France, Italy to keep budget promises

Further Reading