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03/12/2016

France tests EU patience over prospect of budget deficit fines

Euro & Finance

France tests EU patience over prospect of budget deficit fines

Michel Sapin: The draft must be amended. [Parti socialiste/Flickr]

French Finance Minister Michel Sapin has played down any risk that Paris might be fined for breaking EU budgetary rules, days before the European Commission rules on the government’s failure to cut its budget deficit. EU officials, meanwhile, beg to differ.

“The question of fines is brought up every time there’s a meeting,” Michel Sapin said on Thursday (20 November), referring to the upcoming EU decision.

“It’s part of the story-line some write for themselves. It is not an issue and has no substance.”

EU officials, for their part, beg to differ. Several of them have told Reuters that a fine was still an option.

France’s EU partners had given its Socialist government two years in 2013 to meet the target of cutting the deficit to 3% of GDP. But France said last month the deficit would only fall to 4.3% next year from 4.4% in 2014.

It nevertheless received a provisional green light on its plan after offering to trim its deficit by another €3.6-3.7 billion, but the EU executive warned that it would look at the bill in more detail before making a final decision.

>> Read: EU provisionally clears French, Italian budgets after tweaks

“If the disciplinary procedure has to be stepped up because of no effective action on the part of France, it would mean a fine, according to the rules,” one senior EU official with direct knowledge of the talks told Reuters.

Paris and Brussels are sharp in disagreement over economic growth forecast for France, which underpin the country’s ability to meet its budget deficit target.

The European Commission’s autumn forecast was significantly less optimistic than those of the French government. The Commission predicts growth of only 0.7% in 2015 for France, while the deficit is expected to reach 4.4% of GDP, growing to 4.7% in 2016 to become the largest in the eurozone.

The French Finance Ministry disagrees and has predicted growth of 1% for 2015. Christian Eckert, France’s Secretary of State for the Budget, argues that the Commission forecast did not take account of the €3.6 billion savings that were added at the last minute to France’s 2015 budget.

>> Read: New Commission casts doubt over French budget

Oettinger steps in

Europe’s paymaster Germany, meanwhile, seems concerned.

Writing in Les Echos business daily, the EU’s new digital commissioner, Günther Oettinger, said the Commission should insist France undertake “concrete and quantifiable measures coupled with precise deadlines” as a condition for a fresh deficit extension.

“France must commit to clear political goals that will resolve its economic and budgetary problems in a lasting way,” said Oettinger, a senior figure in German Chancellor Angela Merkel’s Christian Democratic Union party.

Without setting conditions, the EU would “lose all credibility”, he said, noting that such conditions should not be seen as a move against France, but as “a measure taken for and with France”.

Referring to the fact part of France’s additional deficit-cutting efforts will be financed by a smaller-than-expected contribution to the EU budget – while Britain must pay more – Sapin said of British premier David Cameron: “It so happens that what is infuriating Mr. Cameron on one side, is a comfort to us on the other side.”

Background

The European Commission provisionally accepted the budgets of France and Italy on 28 October.

The announcement came one day after Paris and Rome amended their draft 2015 budgets in the hope of avoiding censure from the European Union executive.

>> Read: EU provisionally clears French, Italian budgets after tweaks

France is cutting its public deficit less quickly than promised to EU partners, raising the chances that the Commission will reject its 2015 budget and ask for amendments.

French President François Hollande ruled out making bigger savings than the unprecedented €21 billion already planned.

Hollande's Socialist government is wary of trying to squeeze more savings out of the budget on the grounds that tougher belt-tightening could undermine a fragile economic recovery.

Timeline

  • By end November: EU Commission expected to rule on France's draft budget for 2015