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

(B2) The emergency measures taken 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

(credit: European Commission)

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. We must be careful and balance the recommendations carefully 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 need to take aim at a government in difficulty, especially a government which shares the same European views as the Commission. But the essential thing is not there. There is a reality – a budgetary procedure that must not be disrupted – and the measures are only announcements – we do not 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% shift in the competitiveness and employment 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 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 which 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, their financing, and especially the possible compensation measures (savings in other sectors). Making new projections therefore proves to be risky. The consequences of the measures will therefore be foreseen in the next economic forecasts, not in February because these do not relate to the deficit, but in May.

What is sanctioned and what is not?

The European reaction will depend on the magnitude 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. This would be considered “ acceptable to the Commission ". The risk would therefore be mainly reputational in nature ". In other words, France's rating on the markets for debt financing, or at the political level for negotiation with 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 no or even negative structural effort for the 2019 budget, this may trigger a significant deviation procedure. Because France could already be in zero structural effort for 2018.

(Nicolas Gros-Verheyde)

* The French president announced a series of measures on Monday, December 10 evening: an exceptional tax-free end-of-year 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 activity bonus of 80 euros and 20 euros reduction in charges), overtime without taxes or charges from 2019.

Nicolas Gros Verheyde

Chief editor of the B2 site. Graduated in European law from the University of Paris I Pantheon Sorbonne and listener to the 65th session of the IHEDN (Institut des Hautes Etudes de la Défense Nationale. Journalist since 1989, founded B2 - Bruxelles2 in 2008. EU/NATO correspondent in Brussels for Sud-Ouest (previously West-France and France-Soir).

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