France's deficit Vive la Différence No More

France has been allowed to violate Europe's budget deficit rules for too long. It's now up to other E.U. members to ensure it gets its house in order.
France and its president François Hollande risk being shut out if it doesn't get its deficit under control.

Three point zero equals three point zero. That's how Germany's former finance minister Theo Waigel once interpreted the European Union's Stability and Growth Pact.

Since then, many have mocked the infamous threshold for E.U. members' nominal budget deficits, measured as the ratio between debt and gross domestic product. The 3-percent figure is said by critics to be arbitrary and inappropriate both to growth potential - on the wane since the financial crisis - and to the extremely low rates of inflation.

And what’s more, almost no one pays attention to it anyway.

But is this really the case? The fact is that 11 of 19 euro-zone countries are adhering to the 3-percent rule. It’s also the case that former crisis countries such as Portugal, Ireland and Spain have been struggling mightily to reduce their debts for years. Those governments take the stability pact seriously.

They're not the only ones. In Germany, Poland and Latvia a strong political determination also exists to achieve or maintain orderly governmental financing.

The minority of countries is ruining the stability pact’s reputation. The majority cannot allow it to happen.

Yet this budget consolidation, which involves much exertion for some governments, is scarcely noticed. The efforts are submerged by the flood of negative news from Greece, Italy, Belgium and France.

The officials in those four countries who are gambling with budgetary policy and ignoring deficit targets are inflicting great damage on the monetary union. They undermine the faith in fiscal soundness that is essential to the the long-term survival of a currency.

This minority of countries is ruining the stability pact’s reputation. The majority cannot allow it to happen. They must make it clear to the minority that the stability pact is not an empty pretense that can be thrown into the trash can.

Last Wednesday, the European Commission, the E.U.'s executive arm, came to a decision entirely in keeping with this perspective.

It ordered France, which has broken several promises in recent years to drag its budget deficit below 3 percent, to rein in its deficit by the end of 2017. To achieve such a cut from the current level of around 4 percent, France will have to quickly slash spending and increase taxes. This could hit its struggling economy hard.

Even though it didn’t impose financial penalties on France, the Commission's move nonetheless turns up the pressure on Paris enormously. The time of protracting and postponing is over for France’s finance minister, Michel Sapin.

In May, he must now justify his financial and economic policies to the euro group of European finance ministers and present new austerity measures and reforms. The Commission is demanding he achieve bigger reductions in the cyclically adjusted budget deficit and do more to promote the French economy’s international competitiveness.

Mr. Sapin believes he can deliver the goods, but if he doesn't he will have problems with his colleagues. He no longer has many allies in the euro group. Spain and Portugal have distanced themselves from him, and even Italy is showing more courage in addressing long-overdue reforms than France. When the French political class doesn't get moving on its own, it has to be shoved along by others.

The euro zone has no other choice: It must maintain political pressure on Paris.

That effort is fated to be laborious and long-term, and it will require much patience and persuasive power. A change of course cannot be imposed overnight on the French state — and certainly not by means of financial sanctions.

According to the stability pact a penalty should have been imposed by now. But the pact is unrealistic on this point. It doesn't make sense to further weaken an already financially ailing country with a fine. What’s more, a monetary penalty would not lead to the desired stable economic policy.

On the contrary, it would induce even more French opposition to Brussels and swell the ranks of the country's nationalists who are hostile to Europe. The simple truth is financial penalties should be imposed on one's opponents, not one's partners. And France clearly does not number among the former — despite all the criticism of its budgetary behavior.

The euro zone has no other choice: It must maintain political pressure on Paris and endure many more painstaking conversations with the French finance minister.

Until now, the finance ministers of the euro countries have paid too little attention to the monetary union’s second-largest member. If the country declines even further, this will cause serious difficulties for the rest of the tightly woven bloc. Much is at stake for the euro zone — not only the figure of three point zero.


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