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06/12/2016

France tests EU resolve amid growing recession concerns

Euro & Finance

France tests EU resolve amid growing recession concerns

The debt crisis explained. [Euro Crisis/Flickr]

France faced intensifying pressure from eurozone peers on Monday (13 October) to tighten spending next year, in a debate complicated by Germany’s poor economic results, and the spectre of recession in the eurozone.

The dispute with France over its planned 2015 budget is a test of new eurozone powers to police public finances, and is complicated by a wider debate about how to use government money to help the stagnating European economy.

“The figures we are hearing from Paris are not very hopeful,” Jeroen Dijsselbloem, the Dutch finance minister, told reporters at a meeting of eurozone finance ministers, or Eurogroup, in Luxembourg.

Eurozone countries are required to abide by European Union rules that limit a member state’s budget deficit to no more than 3 percent of gross domestic product.

France, which has already been given an extra two years to meet deficit targets, says it will not bring its deficit down to within EU limits until 2017 – four years later than originally pledged, setting up a confrontation with the European Commission, which has the power to reject eurozone budgets.

>> Read: Excessive deficit fine looms over France

Budget surveillance in the eurozone aims to prevent a repeat of the turmoil of the bloc’s 2009-12 debt crisis, which began because countries were living far beyond their means.

Few EU officials need to be reminded of a debacle in 2005 when France and Germany pressured the EU to relax budget deficit rules, sowing the seeds for the debt crunch.

“There are certainly concerns there,” said Dijsselbloem, who chairs the meetings of eurozone finance ministers. “It would be a good thing for Europe if we find a solution for all the budgets within the rules … but no deals outside the pact,” he said, referring to the European budget regime.

He drew a distinction with Italy, which has also argued for some flexibility, saying there was less concern that Italian public finances would stray so far from EU targets.

A French government source said that there would be no changes to the French draft budget before the 15 October deadline for handing it to the European Commission, the EU executive.

French Prime Minister Manuel Valls said on Saturday that it is up to France to decide on its budget and he demanded that Paris be treated with respect by its European partners.

Dijsselbloem said that France would indeed write its own budget but warned that “in between there would be a European discussion” and accepted that there was “peer pressure” on France to respect the rules.

French Finance Minister Michel Sapin suggested Paris may ultimately make some concessions, but that major changes to its 2015 budget would be both politically and technically difficult.

“We’ll see how discussions go, we’ll see how the Commission feels and how it understands our figures,” Sapin told reporters.

‘Hysterical’ calls for action

Germany, the eurozone’s biggest economy, faces calls of a different nature – namely to spend more on investment.

In what has become a familiar but coded call for Germany to spend more, the European Commission’s top economics official Jyrki Katainen said: “Different countries have differing degrees of fiscal space – some are clearly more constrained than others.

“But all member states can and should prioritise investment within their public spending.”

There are signs that recent poor German economic data may be softening Chancellor Angela Merkel’s opposition to increasing public spending. The conservative Merkel says her government is exploring ways to encourage more investment in the German economy, which contracted by 0.2 percent in the second quarter and could weaken further going into 2015.

>> Read: Eurozone seeks to soften German opposition to stimulus spending

German Finance Minister Wolfgang Schäuble, however, played down the prospect of any significant increase in public spending. “We don’t have any grounds for overdoing it in a hysterical manner,” he said. “Rather than reacting by putting big numbers on show, we do concrete projects.

“We need sustainable growth,” he said. “We need more investment, firstly in the private sector and secondly in the public sector, but this must not necessarily be done with public money. It can also be privately financed.”

EU leaders are due to discuss ways to increase investment at a summit on 23-24 October.

One compromise is an infrastructure investment fund of public and private money, although the first draft of a list of potential projects will not be ready until December, according to a document prepared for Monday’s Eurogroup meeting.

The euro zone’s stuttering growth and the risk of deflation are raising alarm among global policymakers, who fear the bloc is again dragging on the world economy just two years after its last crisis. They say the euro zone’s continued strict focus on budget rigour is misplaced.

Investment in the EU has fallen by about 20 percent since 2008, according to the European Central Bank.

EU finance ministers are looking to a plan by the European Commission and European Investment Bank to create a pipeline of projects to boost business and growth potential.

However, there are few details other than that ministers are eager to bring in as much private investment as possible and complement a 300 billion euro investment programme proposed by the incoming Commission president, Jean-Claude Juncker.

>> Read: French wary of ‘fake money’ in EU’s €300bn investment plan

A list of projects and ways to finance them will be presented in December, delaying a pledge made in Milan last month to have something ready for Monday’s Eurogroup meeting.

Background

France's deficit is fast becoming problem number one of the Eurozone.

France was supposed to have brought its budget deficit below the EU ceiling of 3 percent of GDP in 2013, but in June 2013 EU finance ministers gave it a two-year extension, until 2015, because of a recession in the euro zone.

While many countries have tightened their belts by laying off civil servants and cutting pay, France has done neither. The country's public deficit remains very large, and the lack of economic growth leaves a diminished tax base.

As a result, speculation has mounted that the European Commission could reject France's 2015 budget draft at the end of October.

>> Read: Excessive deficit fine looms over France

It would be the first time the EU executive exercises its power to demand changes to a national budget draft under new prerogatives that EU countries granted the Commission in 2013.

Timeline

  • Oct. 15: Deadline for EU countries to hand over their draft 2015 budget to the European Commission.
  • Oct. 23-24: EU summit to discuss economic issues

Further Reading