France and six other countries face EU budget discipline measures By Reuters

By Jan Strupczewski

BRUSSELS (Reuters) -The European Commission said on Wednesday that France and six other countries should be disciplined for running budget deficits in excess of EU limits, with deadlines for reducing the gaps to be set in November.

The move by the European Union’s executive arm is likely to constrain any plans for extra spending by the French government that emerges from a June 30-July 7 election.

That would make it more difficult for the National Rally of Marine Le Pen, which leads in opinion polls, to deliver on promises of more public expenditure and a lower pension age.

The snap vote, called by President Emmanuel Macron after poor results for his party in European Parliament elections, has thrown the EU’s second-biggest economy into political turmoil and pushed up its cost of borrowing in bond markets.

The other countries singled out by the EU executive arm, which is the enforcer of EU laws, are Belgium, Italy, Hungary, Malta, Poland and Slovakia. Their deficits are mainly a legacy of the COVID pandemic and the energy price crisis that followed Russia’s invasion of Ukraine in 2022.

Markets closely watch Italy, the 27-member EU’s third-biggest economy, because of its very high debt of around 138% of GDP and slow growth of less than 1%, and Rome was quick to reassure markets it would do the right thing.

“We are aware that, given the context we find ourselves in, it is necessary to maintain a responsible approach in planning and managing budget policy,” Economy Minister Giancarlo Giorgetti said.

The European Union will use its excessive deficit procedure for the first time since it suspended its fiscal rules, aimed at preventing excessive borrowing, in 2020 as governments struggled with the impacts of COVID-19. It has since reformed the framework to take into account the new economic realities of high post-pandemic debt.

France had a budget gap of 5.5% of gross domestic product in 2023, forecast to narrow only slightly to 5.3% this year – still well above the EU deficit limit of 3% of GDP.

French public debt was 110.6% of GDP in 2023 and the Commission expects it to increase to 112.4% this year and 113.8% in 2025. That is almost twice the EU limit of 60%.

Talks between Paris and the Commission on how quickly to reduce France’s deficit and debt will take place in the coming months after the EU executive proposes to Paris a seven-year programme to put debt on a downward path.

PROPOSALS

The Commission will kick off discussions this Friday by sending its own proposals for possible fiscal consolidation to governments, which will each respond with their own scenarios until a deal is reached.

“Whatever government is formed after the election on July 7 will face the obligation to work with the Commission to define a medium term strategy,” a French finance ministry official said.

“Eventually it will have to produce a strategy coherent with the new Stability and Growth Pact,” the official, who asked not to be named, said.

But with the far-right National Rally (RN) leading in polls, the Commission is likely to be facing a strongly eurosceptic government in Paris that wants to loosen, rather than tighten, fiscal policy.

Le Pen’s protectionist “France first” economic stance is also a concern for financial markets already worried about the country’s public finances.

“The gradual fiscal consolidation planned by the current government will be the first casualty of the political crisis,” Oxford Economic economist Leo Barincou said in a note.

“A divided parliament is unlikely to be able to agree on politically difficult spending cuts, which would result in a higher deficit than our current baseline. Meanwhile, the implementation of the RN platform as it currently stands would add to the public deficit,” he said.

Investors dumped French assets last week because of the political uncertainty, with French bond yields recording their biggest weekly jump since 2011 and bank stocks tumbling.

Pressure from investors is likely to be decisive for governments to stick to consolidation paths agreed with the Commission, because the EU executive has already signalled it would not revert to imposing penalties for missing targets.

In theory, if a government does not consolidate its finances as agreed, the Commission could move to cut it off from EU post-pandemic funds and money to equalise standards of living in the bloc, which could mean billions of euros.

But EU officials said that because the deficits and high debt were all a result of external shocks to the whole EU, not individual policy mistakes, the possibility of fining any government did not apply.