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Paris and Brussels look set to clash over efforts to bring French spending back into line with EU rules, as political turmoil in the region’s second-largest economy risks delaying progress on cutting its “excessive” budget deficits.
Draft guidelines presented privately by EU officials to Paris at the end of June, and seen by the Financial Times, show Brussels wants France to impose spending cuts of €15.4bn, or 0.6 per cent of GDP, on average per year over the next seven years.
France’s fragmented political landscape, following inconclusive parliamentary elections this month, is now complicating matters further.
The leftwing Nouveau Front Populaire alliance, which won the largest number of seats in the National Assembly, wants to form a government with tax-and-spend policies.
This includes a reduction of the retirement age and an increase in the minimum wage — that would trigger a €179bn-a-year rise in the deficit to more than 10 per cent of GDP, according to estimates from the Institut Montaigne think-tank.
While it is not clear whether the alliance, hobbled by infighting, will even get a shot at trying to lead the government, President Emmanuel Macron’s capacity to control spending after years of Covid-fuelled excess will be constrained either way.
No political group is close to an outright majority, which for the moment leaves a caretaker cabinet in charge with no mandate for big budget decisions.
Privately, EU officials worry that a new French government, once it emerges, will disregard the budget commitments made by its predecessor — which were themselves dismissed as scarcely credible by the French national auditor — and land Paris in a head-to-head confrontation with Brussels over its finances.
In public, EU officials remain adamant that Paris must stick to EU rules that limit deficits to 3 per cent of GDP.
“We are aware of the institutional difficulties coming from the fact that in France we will have a caretaker government with more limited powers,” EU economy commissioner Paolo Gentiloni said earlier this week, adding: “But it is clear that there is a need for fiscal adjustment in France.”
While Gentiloni acknowledged that reining in spending was “not an easy task” for any country, the European Commission’s plans for France and others were “very realistic”. “It’s not something obliging countries to do impossible things,” he said.
However, diplomats and economists believe France will struggle to get spending back on track.
The country exceeded the 3 per cent EU maximum last year with a 5.5 per cent deficit, which Macron’s government blamed on lower-than-expected tax revenues and the legacy of emergency spending during the pandemic and European energy crisis.
The last time France had a budget surplus was in 1974, though it complied with the 3 per cent limit in 2019.
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Referring to Brussels’ plans for spending cuts, an EU diplomat said: “Spain will probably do it, Italy will be difficult, for France it will be nearly impossible.”
Andrew Kenningham, chief Europe economist at Capital Economics, said even without a change in government, getting France back on track to compliance “would have been difficult”. “Parliament is now stacked towards even less enthusiasm for deficit reduction,” he added.
Under current plans, Paris does not envisage respecting the EU’s 3 per cent deficit threshold until 2027.
France’s caretaker finance minister Bruno Le Maire, who is in the process of drafting a budget for 2025, said on Monday that the government had outlined €25bn in savings since the start of the year.
Some €15bn of those take effect in 2024, but the rest — including a recent request for ministries to freeze an additional €5bn in spending — could be unwound by whoever ends up governing.
France’s financial situation had already led to a so-called excessive deficit procedure being opened against it for breaching the EU’s spending limits, alongside six other countries.
The process could lead to fines of up to 0.05 per cent of GDP, although they have never been imposed despite multiple breaches.
Pierre Moscovici, chair of France’s national auditor, warned this week that plans to reach the 3 per cent target by 2027 was becoming “less and less credible”.
IMF chief economist Pierre-Olivier Gourinchas told AFP on Tuesday that “without a serious adjustment”, reaching the 3 per cent goal over the next four years would be “difficult”.
Parliamentary negotiations over next year’s budget look set to trigger more conflict between and within the different parties.
The negotiations, which begin in October, also threaten to expose the difficulty of remaining in power, while simultaneously cutting public spending.
“Reducing the debt and the deficit is an imperative,” Moscovici said this week. “It’s not a question of right or left, it’s a question of public interest.”
Under reformed EU spending rules, the commission negotiates a four-year plan with member states that breach the 3 per cent limit. Countries are allowed another three years to reduce deficits, provided that they commit to a package of structural reforms.
If an agreement on the extension cannot be reached, the required budgetary haircut is sharper and would be €24.1bn per year over four years for France, or 0.94 per cent of GDP per year. “You can ask for an extension but have to have a [deficit-reduction] plan,” said Moscovici.
Countries have until September 20 to submit their multiannual plans, which need to be approved by the commission and other EU countries.
While Brussels can accept some flexibility, it remains unclear whether France could meet any realistic deadline.
Other capitals are watching closely to ensure that the commission makes France and others comply.
“It’s in our common interest to maintain sustainability of our public debt,” said German finance minister Christian Lindner on Monday. “Any future French government would have to follow these rules as well.”