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09/12/2016

France wins EU approval for two-year reprieve on deficit

Euro & Finance

France wins EU approval for two-year reprieve on deficit

Michel Sapin (left) and Jeroen Dijsselbloem at the Eurogroup, October 2014. [Council of the European Union]

European finance ministers on Tuesday (10 March) approved a controversial two-year extension for France to get its deficit within the bloc’s limits, despite accusations that bigger member states are treated more leniently than smaller ones.

They formally accepted assessments by the European Commission, the executive arm of the 28-member European Union, of the national budgets of member states including the reprieve for France.

“The Council found that extending the deadline for correcting the deficit was justified by the fiscal effort made by France since 2013, and by the current weak economic conditions and other factors,” the finance ministers said in a statement.

“France needs to step up its efforts both on fiscal and structural reforms… We are putting France under tight deadlines,” Valdis Dombrovskis, European Commissioner for the Euro and Social Dialogue, said after the ministerial talks.

In their new recommendation, EU finance ministers set deficit targets for France of 4.0% of GDP for 2015, 3.4% for 2016 and 2.8% for 2017.

In its decision announced in late February, the Commission gave France until 2017, but ordered it to report back on reforms in three months, after deeming that commitments pledged by Paris fell short.

France was accorded the extra two years to work down its public deficit – the difference between government spending and revenue – from 4.0% of annual gross domestic product in 2015 to 2.8% in 2017.

>> Read: EU gives France to 2017 to cut deficit, Italy, Belgium in clear

But the warning ignored demands by some European officials for France to be called to task as a repeat offender of the EU rule that national deficits not exceed 3.0% of economic output.

France has received several extensions in recent years to meet the rules, and a key official at the European Central Bank warned that the rules were being undermined with major economies treated more leniently than smaller ones.

“It’s always extremely important in Europe to avoid a situation – or even to avoid the perception – that large countries are treated in a more benevolent way, in a more generous way, in a more flexible way than smaller countries,” ECB executive board member Benoit Coeure told the Financial Times.

Some smaller countries have made their frustration known, with bailed-out Ireland on Tuesday asking for the same flexibility terms offered the much more powerful France.

“I supported the commission proposal, including the extension to France… but I used the opportunity to say that we needed the flexibility in the application of the rules as well,” Irish Finance Minister Michael Noonan said after the talks, according to the Irish Times.

>> Read: After France, Ireland wants EU budget flexibility

Germany, the EU economic powerhouse that pushes for balanced budgets, refrained from overtly criticising France and also approved the extension, but not without issuing a warning.

“If the Commission is too flexible on the growth and stability pact (budget rules) for political reasons – it has to be aware there will be consequences,” said Wolfgang Schäuble, Germany’s Minister of Finance.

For his part, French finance minister Michel Sapin stressed that the new deadline extension was in conformity with the budget adjustment path that Paris had initially set for herself.

“So we now have a path set by France and a path set by the EU, which are converging. It is the same path that brings us together,” Sapin said after the meeting. “We now have a balanced budget policy”.

Background

In 2013, European Union finance ministers gave France a two-year extension to bring its deficit below the EU ceiling of 3% of GDP.

Paris was asked to cut labour costs, reform its pension system and open up its protected markets in exchange for the two-year respite.

The reforms were suggested as part of the European Commission's economic policy recommendations, which are sent to member states each year.

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

However, France declared last year it would not meet the 2015 deadline, and would only hit the target in 2017.

This placed Paris under the threat of fines, of up to €4 billion.

After examining the situation, the Commission proposed giving the country another two-year extension, until 2017, calling on France to bolster efforts to get its budget back in order.

This triggered sharp criticism from EU budget hawks, such as Germany's centre-right.

>> Read: German centre-right ‘disappointed’ over extension of French deficit deadline

French President François Hollande said afterwards that his government would find €4 billion in "new savings" in 2014 to meet demands from Brussels.

>> Read: Hollande pledges €4bn in 'new savings' to meet EU deficit target

Timeline

  • By mid-April: EU countries, including France, expected to present National Reform Programmes
  • May: EU Commission to present a new set of country-specific recommendations
  • 10 June: New deadline for France to "take effective action" to bring its deficit below 3% of GDP
  • 2015: France to hit deficit target of 4.0% of GDP
  • 2016: France to hit deficit target of 3.4% of GDP
  • 2017: France to hit deficit target of 2.8% of GDP

Further Reading

Council of the EU

European Commission