Commission to judge in May France’s deficit deviation

European Commission President Jean Claude Juncker and French President Emmanuel Macron arrive on the first day of the European Council Meeting in Brussels, 19 October 2017. European leaders meet in Brussels on 19 and 20 October 2017 [EPA-EFE/JULIEN WARNAND]

The European Commission will conclude in May whether France’s deficit slippage caused by new spending measures represents a limited and temporary deviation allowed by the rules.

In an interview published by French newspaper Le Parisien on Tuesday (12 December), Economic Affairs Commissioner Pierre Moscovici pointed that, according to the rules, the 3% budget deficit threshold can be exceeded “in a limited, temporary, exceptional way”.

“But every word counts: the eventual overrun of the 3% must not extend over two consecutive years, nor exceed 3.5% over one year,” he told the newspaper.

The new measures announced by French President Emmanuel Macron early this week in response to ‘yellow vests’ protesters are expected to push the deficit to around 3.4% of the GDP next year, according to some estimates.

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However, the deficit could miss the 3.5% exceptional limit, depending on the economic impact of the protests that hit France over the past month. Although there are no detailed figures, damages caused by the rioters could be worth billions of euros.

In regard to surpassing a 3% deficit over two years, the French deficit is expected to be 0.9% smaller in 2020 without additional measures, given the one-off Tax Credit Competitiveness Employment (Crédit d’impôt pour la compétitivité et l’emploi – CICE).

Without further measures, and excluding any potential cost of the protests, the deficit would decrease to 2.5% in 2020, following the implementation of the spending measures announced by Macron.

May’s verdict

The Commission will look into France’s deficit in May, following the cycle of the European semester, the EU’s framework to coordinate national macroeconomic and fiscal policies, EU officials told

The Commission will wait for its Spring forecast to see the results of France’s fourth quarter, to calibrate the impact of the yellow vests’ protests.

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The EU executive will also wait to see the final implementation of the spending package. Macron said he would raise the minimum wage for workers and introduce tax cuts for some pensioners and overtime workers.

But the French government also announced that it would respect the EU’s commitments in regards to the spending rules.

A significant slowdown in the final quarter of this year could force Paris to announce new adjustments to compensate for part of the new expenditure, in order to ensure that the deficit remains below the 3.5% exceptional limit in 2019.

In his interview with Le Parisien, Commissioner Pierre Moscovici said the new measures represent “a starting point” in the effort to address the growing “fracture” between a France that is well, in the metropolis, and a France that suffers, in semi-rural areas.

France and Italy

France’s risk of breaching the EU’s fiscal rules comes as Italy is fighting with the EU executive for extra margin for its next year’s budget.

The Italian government made an effort to link its case to the French situation. But Moscovici said “the comparison with Italy is tempting but wrong because the situations are totally different”.

“The European Commission has been monitoring the Italian debt for several years; we have never done it for France,” he added.

Italy one step closer to EU budget procedure

Italy’s deputy Prime Minister Luigi Di Maio said he was confident about ongoing talks with the European Commission over the country’s budget, despite a fresh recommendation by EU government representatives on Thursday (29 November) to open an excessive deficit procedure against Italy.

Italian Prime Minister Giuseppe Conte will meet on Wednesday afternoon with Commission President Jean-Claude Juncker. He is expected to bring a revised version of the Italian budget, with a deficit lower than the 2.4% of GDP initially included as part of the proposals adopted by the ruling Five Stars Movement and La Lega.

Rather than look at the headline deficit, the Commission requests from Italy at least a small structural effort via adjustments or new taxes to fulfil the Stability and Growth Pact.

Brussels demanded from Rome an effort worth 0.6% of its GDP. Instead, its budget represented a fiscal expansion worth almost 1% of its GDP.

The Commission and Italy also disagree over the numbers. The EU executive believes that the Italian deficit will reach 2.9% of GDP next year if the draft budget is implemented, half a point higher than Rome’s forecast.

Commission: Italy, EU to work to bring views on 2019 budget closer together

Italy and the European Commission will work in the coming days to bring closer their positions on Italy’s 2019 draft budget, which the EU executive says breaks EU laws by not reducing the country’s huge public debt.

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