The European Commission announced on Wednesday that France and six other European Union countries will face disciplinary measures for exceeding budget deficit limits. The deadlines for reducing this deficit will be set next November.
This step by the executive arm of the European Union is expected to restrict any additional spending plans by the new French government that will emerge from the elections scheduled for the period from June 30 to July 7.
According to the reformed rules, EU member states may not accumulate debts exceeding 60% of GDP.
Heavily indebted EU countries whose debt levels exceed 90% of GDP must reduce their debt ratio by one percentage point annually, and countries whose debt levels range between 60% and 90% must reduce their debt ratio by half a percentage point.
This would prevent Marine Le Pen’s National Rally, which is currently leading in opinion polls, from fulfilling its promises to increase public spending and lower the retirement age.
Political and economic unrest
The early elections, called by French President Emmanuel Macron following his party’s weak results in the European Parliament elections, plunged France – the second largest economy in the European Union after Germany – into a state of political chaos. This instability has increased French borrowing costs in bond markets.
Other countries identified by the European Commission include Belgium, Italy, Hungary, Malta, Poland and Slovakia.
This deficit is primarily due to the repercussions of the Corona pandemic and the energy price crisis following the Russian invasion of Ukraine in 2022.
Italy responds and has wider implications
Italy, the third largest economy in the European Union, with debt at 138% of GDP and growth of less than 1%, reassured the markets of its commitment to responsible financial management.
“We realize that, given the context in which we find ourselves, it is necessary to maintain a responsible approach in planning and managing budget policy,” said Economy Minister Giancarlo Giorgetti.
This represents the first use of excessive deficit measures in the European Union since they were suspended in 2020 due to the Corona epidemic. Since then, fiscal rules have been reformed to take into account the new economic realities of rising post-pandemic debt.
France and budget challenges
France’s budget deficit reached 5.5% of GDP in 2023, and is expected to shrink slightly to 5.3% this year, still above the European Union’s maximum of 3%.
French public debt reached 110.6% of GDP in 2023, and is expected to rise to 112.4% this year and 113.8% by 2025, nearly double the EU cap of 60%.
The Commission will propose a seven-year plan to Paris to reduce its debt, and discussions are scheduled to begin soon. An official at the French Ministry of Finance indicated that “any government that will be formed after the July 7 elections will face an obligation to work with the Commission to determine a medium-term strategy.”
Fears and doubts in the European Union
With the far-right National Rally party leading in opinion polls, the European Union may face a French government that is skeptical of the viability of the union and seeks to ease fiscal policies.
Le Pen’s “France first” economic stance has raised concerns among financial markets already concerned about the country’s public finances.
Leo Barenko, an economist at Oxford University, warned Reuters that the political crisis could derail the planned fiscal consolidation. “A divided parliament is unlikely to be able to agree on politically difficult spending cuts, which could lead to a deficit higher than our current baseline,” Barenko said.
Political uncertainty led investors to sell French assets, causing French bond yields to see their biggest weekly rise since 2011 and bank stocks to fall.
Investor pressure is likely to be crucial in ensuring that governments adhere to the integration pathways agreed with the Commission.
The EU executive has indicated that it will not impose sanctions on missing targets. However, in theory, a failure to unify finances could lead to a disruption of post-pandemic union funds and other forms of financial support, which could amount to billions of euros.
EU officials have stated that because deficits and rising debts result from external shocks rather than individual policy failures, the possibility of fines on governments does not currently apply.
