E.U. Austerity France Asks for Leniency

The French government has asked for another three-year extension to meet its deficit targets. Will the European Commission give them the time they need?
France appears to be less enthusiastic in its savings efforts.

France’s financial problems are worse than many may have thought.

President Francois Hollande’s government has asked the European Commission to extend its deadline for reducing its budget deficit by three years, Handelsblatt has learned. It marks the third time France has asked for more time to bring its budget in line.

French Finance Minister Michel Sapin committed to some additional measures to bring down his country’s structural deficit in 2015, in a letter to the European Commission on Thursday. But he did not promise enough to meet the European Union's rules on debt by the end of the year.

The European Commission will decide whether to grant France the extra time in the first week of March.

The request for more time has not gone down well in Germany, which is prodding its European partners to do more to hold down their deficits rather than relaxing the 28-nation European Union's commitment to running solid budgets.

“The credibility of the stability pact is at stake," Günther Oettinger, Germany’s E.U. Commissioner, told Handelsblatt. "France is not where it is supposed to be yet.”

The Stability and Growth Pact was adopted by euro zone countries in 1997, to ensure budgetary discipline among the 12 countries that had started using the euro, with Germany the driving force behind the agreement. The rules, which require governments to keep their annual deficits below 3 percent of economic output, were strengthened in the aftermath of the European debt crisis.

It's not the first time Brussels has been in this position with France. The European Commission originally found that Europe’s second-largest economy had an excessive household deficit of 7.2 of the country’s GDP in 2009.

In 2013, although the country's economy had improved, France still had an annual deficit of 4.1 percent, 1.1 percent more than the E.U. cap of 3 percent.

The European Commission will likely decide whether to grant France the extra time in the first week of March.

If France continues its current budgetary approach, the country’s deficit would decrease by a mere 0.3 percentage points in 2015, the European Commission stated in its most recent economic forecast of March 2014. According to the Commission, it needs to sink by at least another 0.8 percentage points to be brought into line.

Pierre Moscovici, the E.U. Commissioner of economic and financial affairs, has already shown willingness to bend, but only so far. Mr. Moscovici is asking France for measures that would achieve a 0.5-percentage-point decrease in spending in 2015.

This is the third time that France has asked for an extension to bring its finances in order. The French government was given its most recent extension in 2013, when it gained two more years to bring its deficit down.

The French government argues it needs more time because its economy has failed to gather steam over the last few years. France’s GDP grew by 0.1 percent in the last quarter of 2014. Compared to other large European economies, this was a rather small increase. Germany and Spain both recorded a rise of 0.7 percent.

But granting France another three years would not be received well by many E.U. commissioners. Mr. Oettinger's opposition is backed by Spain’s and Portugal’s commissioners. In fact, they are proposing sanctions be imposed against France for failing to meet its 2015 deadline, according to sources in Brussels.

The German government, too, expects the European Commission to attach stringent conditions if it decides to give France one last chance, Handelsblatt has learned from sources in Berlin.

France share of EU-GDP-01

President Hollande was elected in 2012, replacing President Nicolas Sarkozy who had ruled Europe’s second largest economy since 2007 with his conservative party Union for a Popular Movement, or UMP.

It was in Mr. Hollande, leader of the left-leaning Socialist Party since 1997, that the French put new hopes of pulling the country out of its debt and increasing social issues. Mr. Hollande's popularity promptly fell to the lowest of any French president as he has failed to pull the country out of its economy slump.

The president's popularity has recovered recently after the attacks on the satirical magazine Charlie Hebdo.

 

Ruth Berschens has been Handelsblatt's bureau chief in Brussels since 2009. Jan Hildebrand leads Handelsblatt's financial policy coverage from Berlin. Thomas Hanke has been the Handelsblatt correspondent in Paris since 2012. Sarah Mewes is an editor at Handelsblatt Global Edition in Berlin and contributed to the article. To contact the authors: [email protected], [email protected], [email protected] and [email protected]