The European Commission has issued a warning about imbalances in France's economy. But an excessive budget deficit threatens to expose the country to first-time sanctions.
France and Slovenia are the only two countries to have received a specific recommendation from the EU executive on public deficits.
During the presentation of its country-specific analysis of macroeconomic imbalances on 5 March, the Commission has used “a new instrument to attract the attention of two eurozone member states, namely France and Slovenia on the risk of non-compliance with the recommended budget target for this year.”
Already under an excessive deficit procedure, France pledged to reduce its annual budget deficit under 3% of Gross Domestic Product (GDP) after having been granted a two-year delay in May last year.
But this week's assessment gives little hope that France will deliver on its commitment, making the Commission recommendation sound like a serious warning.
The French government pledged to reduce its annual deficit to 3.6% of GDP in 2014 and hopes to lower it further to 2.8% in 2015. But in its latest macroeconomic forecast, published on 25 February, the EU executive is much more pessimistic, expecting a deficit of 4% of GDP by the year’s end, and 3.9% in 2015.
Paris claims the difference can be explained by the Commission's lack of consideration of its latest economic reforms. “For 2014, the Commission’s forecast remains surrounded by many uncertainties,” the French ministry of economy and finances said in a statement.
But the view from Brussels is quite different. “The French government has a tendency to overestimate the impact of its reforms and its savings plans,” says an EU expert who argues that the EU executive has already taken into account a number of recent reforms announced by Paris in its budget estimates. Those include the tax credit for competitiveness and employment, and all the implemented reforms except the recently-announced “responsibility pact” which is not considered sufficiently detailed.
The pact was announced by President François Hollande and plans to cut €30 billion of employers’ contributions by 2017.
“We’re looking forward to be able to analyse the details,” the EU economic and monetary affairs Commissioner Olli Rehn said at a press conference in Brussels.
Now that the alarm has been raised, France’s options look limited. The objective of bringing down the annual deficit to 3% of GDP by 2015 does seem not renegotiable at the moment, particularly because of pressure from Germany.
France still has the option of adjusting its effort on structural reforms. “France can possibly offer a new path to reduce its deficit,” an expert concedes. However flexibility is limited, and there is no guarantee that the Commission is prepared to review its recommendations.
In any case, the Commission can now make decisions quickly on the French deficit. Spelling out a new recommendation is one of the options, but the use of sanctions is not off the table. This would be a first under the growth and stability pact.
If the structural effort by France does not comply with the Commission’s objectives for 2013 and 2014, the EU executive is required to make a recommendation to the Council by proposing sanctions. The 28 member states must then approve the recommendation with a reverse qualified majority, meaning a qualified majority of member states have to vote against the recommendation in order to reject it.
On the macroeconomic imbalances front, the Commission pins down 14 member states: Belgium, Bulgaria, Germany, Ireland, Spain, France, Hungary, the Netherlands, Finland, Sweden and the United Kingdom. In three countries, those imbalances are considered excessive: Croatia, Italy and Slovenia.
In France, despite the measures taken to boost competitiveness, “the cost of labour remains high and weighs on companies,” Olli Rehn said. “To meet the competitiveness challenges, France needs to improve the business environment and strengthen competition in services,” the Commissioner recommended.
The EU executive should spell out more detailed recommendations for each member state in early June, after countries submit their mid-term budgetary plans.
Despite tightened surveillance by the Commission, which is calling for “decisive measures” to correct French imbalances, Paris is still under the "preventive arm" of the EU budgetary surveillance procedure. It will therefore not be possible to switch to the corrective arm when the Commission reconsiders its recommendations in June.