How France Will Be a Test of Europe’s Ability to Enforce Its Budget Rules

European Union Aims to Put New Muscle into Limiting Deficits; Will it Succeed?

Since 2009, France’s state budget has been breaking the rules. It has been exceeding the European Union’s limit on the size of deficits, which are limited (under the Maastricht Treaty) to 3 percent of gross domestic product unless there are exceptional circumstances. Once in excessive deficit, a country must fulfill a specific timeline agreed, by European finance ministers, for coming back into compliance. Until this week, France’s deadline to bring its deficit below 3 per cent of GDP was 2015.

This week, however, the European Commission will announce that the French budget complies with the rules, despite the fact that it does not foresee a deficit below 3 per cent for the years ahead. Even if growth recovers, the French deficit likely will remain above the threshold until the end of this decade.

This announcement is the first application of a new set of rules known as the Two-Pack. This policy has the European Commission issue opinions on countries’ draft budgetary plans, and it tightens monitoring and coordination among euro-area member states on the conduct of their economic policies. One could argue that the French case is a clear failure of European institutions which have in the past not been able to enforce rules.

This would be the reading from a very legalistic point. From a substantial viewpoint however, the French case shows how rules broadly serve as a benchmark for member states, but also how the exact interpretation of these benchmarks remains very flexible to take into account wider circumstances that might justify a higher budget deficit, including political reasons.

This is the typical EU story since the introduction in 1999 of the euro and the Stability and Growth Pact. Among the twenty-eight EU members, only two countries—Estonia and Sweden—have always held their budget deficits below the limit of 3 percent of GDP. Yet no country has ever been sanctioned. So rules, including the reinforced Two-Pack regime, are crucial to enhance coordination and create stronger peer pressure. Still, even this will not force member states to run lower deficits if their governments and national parliaments are not willing to do so.

Since the case of France is the first application of the new rules, the credibility of this new approach is at stake.

There is no doubt that the French economy is not recovering, and an additional tightening of fiscal policy would negatively affect the already weak economic growth. However, France is currently just buying time. Its government is avoiding investing the political capital needed to more ambitiously cut its budget expenditures. But sooner or later the French deficit has to be lowered, and this can happen either through lower expenditures and higher revenues or by pushing economic growth.

France should use this time to fully implement reforms that can make its economy more competitive. According to a recent study by the OECD, economic reforms announced or undertaken may generate additional 0.3 percent GDP growth every year for the next five years. This is not a lot, but it will make the difference between a growing public debt and a stable one.  

As European partners prepare to let France’s excessive deficit run for as long as ten years, they should ask for a set of deliverables in much more stringent ways. This could take the form of stricter monitoring, coupled with public recommendations on specific reforms underway, to create sufficient pressure to execute these reforms. More specifically, monitoring could include a regular, on-site technical mission of the European Commission and reviews with measurable indicators on the implementation of reforms. 

However, if EU institutions decide that a purely generic commitment is sufficient in France’s case, then there is a great risk that other countries will follow, running high deficits with weak commitments, and the new framework will rapidly lose any credibility.

 Andrea Montanino is the director of the Atlantic Council’s Global Business and Economics Program. He has served as an executive director of the International Monetary Fund and a senior economist at the European Commission.

(B. Monginoux / License)

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Image: The Champs Elysees in Paris, where the governmenbt of President Francois Hollande has been tussling with the European Commission over its continued high budget deficits. (B. Monginoux / License)