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09/12/2016

French deficit takes centre stage in EU’s winter forecast

Euro & Finance

French deficit takes centre stage in EU’s winter forecast

Pierre Moscovici

[EC]

France’s budget deficit this year will be far above the EU limit and will not move in 2016 unless policies change, the European Commission forecast on Thursday (5 February), stepping up pressure on Paris to act before an evaluation later this month.

The European Commission, which is the guardian of EU laws, said it expected the French deficit to narrow only to 4.1% of GDP this year from 4.3% last year, and stay at 4.1% in 2016 despite faster economic growth.

European Union finance ministers in 2013 gave France a two-year extension until 2015 to bring its deficit below the EU ceiling of 3% of GDP.

However, France declared last year it would not meet the 2015 deadline either and would only hit the target in 2017. But unless the European Commission recommends another extension to EU ministers, France faces a fine of up to €4 billion.

The latest Commission forecast for the French deficit this year and next is more favourable than the 4.5% of GDP forecast for 2015 last November and 4.7% for 2016.

But it is still far from the target, especially the measures the Commission looks most closely at. The structural deficit, which excludes the effects of the economic cycle and one-off revenues and spending, will also fall well short of requirements.

EU ministers have asked France to reduce its structural gap by 1.3% of GDP in 2013, 0.8% of GDP in 2014 and the same in 2015. The Commission forecasts show that France cut its structural deficit by only 1.0% in 2013 and 0.4% in 2014.

The reduction in 2015 is likely to be only 0.3%, the Commission said, and the structural deficit will jump up again by 0.4% of GDP in 2016.

Even if the structural targets set by EU ministers were to be disregarded, EU rules set the minimum structural deficit cut at 0.5% of GDP every year until balance.

“Our estimate is that certain measures will be necessary to bridge this gap… there is a gap between 0.3% and 0.5% so an effort needs to be made,” EU Economic Affairs Commissioner Pierre Moscovici told a news conference.

He said the Commission was also looking at French structural reform plans and would make an evaluation of the country’s efforts to comply with EU budget rules on February 27.

French economic growth is to accelerate to 1.0% this year from 0.4% in 2014 and speed up to 1.8% in 2016, the Commission forecast.

The high deficit and relatively slow growth will push French public debt up to 97.1% of GDP this year from 95.3% in 2014 and further to 98.2% in 2016.

Background

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

While many countries have tightened their belts by laying off civil servants and cutting pay, France has done neither.

The European Commission urged France in 2013 to push ahead faster with economic reforms in return for being granted two more years to bring its budget deficit below the EU limit.

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

Paris was asked to cut labour costs, reform its pension system and open up its protected markets in exchange for a two-year respite to bring its budget deficit under 3% of GDP.

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

The European Commission said possible measures for the pension reform included adapting indexation rules and increasing the statutory retirement age and full-pension contribution period, "while avoiding an increase in employers' social contributions."

>> Read: France placed under EU reform scrutiny

Further Reading

European Commission