Is France in fiscal slippage? What can and what will Europe do?

(B2) The measures taken in disaster by the French government * to appease the anger of the yellow vests are precisely analyzed by the European Commission. But the result is not yet known

Why this caution?

We can consider that it is due to the size of the country. This is not only a consideration of France's political weight, it is also due to its economic importance. You have to be careful, carefully dose the recommendations so as not to cause a 'snowball' effect on the markets. There is also, it must not be denied, a political appreciation. There is no point in firing red balls at a government in difficulty, which moreover is a government which shares the same European views as the Commission. But the main thing is not there. There is a reality — a budgetary procedure which it is important not to upset — and the measures are only announcements — we don't really know what they cover.

What is the current French budget deficit (before the measures)?

The Commission's autumn forecast predicted:

for 2019 : a nominal deficit of 2,8% of GDP (1,9% + 0,9% changeover of the employment competitiveness tax credit, with a structural adjustment of around 0,2% of GDP

for 2020 : a nominal deficit at 1,7% of GDP

What will be the evaluation criteria?

In the measures announced, of around ten billion, the European Commission “will have to establish on the occasion of the next forecasts” explains an expert on the subject: 

1° What only degrades the nominal deficit : single measurements (says one off as was the CICE) or measures that would only be in place for 2019.

2° What degrades the structural deficit : longer-term measures. Among the measures announced, there are two of the measures announced yesterday.

Why is it not possible to do the evaluation right away? When will it be done?

There are no exact details on the content of these new measures, on their financing, and above all on the possible counterpart measures (savings on other sectors). Making new projections therefore turns out to be risky. The consequences of the measures will therefore be provided for in the next economic forecasts, not in February because these do not concern the deficit, but in May.

What is sanctioned, what is not?

The European reaction will depend on the extent of a deficit:

If the deficit is between + 3% and less than 3,5%, over a single year, this is provided for by European rules. It would be considered " acceptable to the Commission ". The risk would therefore be mainly reputational in nature ". In other words, the rating of France on the markets for the financing of the debt, or at the political level for the negotiation with the other member countries, on other subjects (the Euro Zone for example).

On the other hand, if the nominal deficit reaches 3,5%, this automatically triggers an excessive deficit procedure in respect of the deficit requiring its correction.

If there is a zero or even negative structural effort for the 2019 budget, this may trigger a procedure for significant deviation. Because France could already be for 2018 in zero structural effort.

(Nicolas Gros-Verheyde)

* The French president announced Monday evening December 10 a series of measures: an exceptional end-of-year tax-exempt bonus, the increase in the CSG canceled for pensions of less than 2000 euros, the acceleration of the activity bonus of 100 euros (80 euros of activity bonus of 80 euros and 20 euros of reduction in charges), overtime without taxes or charges from 2019.