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4th Apr 2020

France, Italy, Belgium to get extra three months on deficit and debt

  • Hollande got his way with the Juncker commission (Photo: Council of European Union)

The EU commission on Friday (28 November) is set to give France, Italy and Belgium three more months to implement deficit-and-debt cutting measures or face fines.

It is the first time the commission splits its verdict on national budgets into two parts: acknowledging that France, Italy and Belgium are in breach of the deficit-and-debt rules (Stability and Growth Pact), but delaying a decision on the consequences until March.

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"We received letters at the highest level from three countries. These are high level assurances we asked for, so we will check now how they are applied and issue the recommendations in March," an EU official said.

France has already twice received a postponement of its deficit reduction deadline, which should have been under three percent of GDP by 2015. But according to its draft budget, it plans to run a deficit of 4.3 percent of GDP in 2015 and will meet the three-percent target only in 2017.

Paris adopted a last-minute promise to shave €3.6 billion off the deficit - but critics noted that no new reforms are being undertaken.

If in March the commission is still not convinced that Paris is taking real action to meet the deficit target, France could face a fine of up to €4.2 billion.

Italy and Belgium are blacklisted because of their public deficits, which are far above the 60 percent of GDP foreseen in the Stability and Growth Pact. Instead of going down, their debt is ballooning and if no measures are taken by March, the commission may place the two countries under increased control over their fiscal and economic policies.

In his letter to the economics commissioners, Italian finance minister Pier Carlo Padoan blames the increase in public debt on factors beyond his government's control.

"The increase in the public debt-to-GDP ratio in Italy in the recent past is not due to a loose fiscal policy. Instead, it reflects the contributions to the euro area financial stability programmes, the settlement of commercial debt arrears and negative nominal GDP growth," the letter reads.

Apart from those three countries, Spain, Portugal, Malta and Austria are also at risk of breaching the EU rules.

There are two schools of thought about the extra three months allowing France and the others to tweak their budget plans.

One, defended by France and Italy, says that too many deficit-reducing measures at a time of low growth and recession risks aggravating the problem. The focus should be on investments and boosting economic growth, the arguments runs, including with state subsidies or tax exemptions.

On the other hand, fiscal discipline hawks, notably Germany's finance minister Wolfgang Schaeuble, but also the German commissioner Guenther Oettinger, say this is a credibility test for the EU which risks being accused of letting France and Italy off the hook because they are large member states, after having imposed harsh austerity measures on Greece, Ireland, Portugal and Cyprus.

After having to deal with French politicians' ire following a criticial op-ed, penned by Oettinger, European Commission President Jean-Claude Juncker is hoping that the three-month delay will appease both camps.

In March, however, a verdict will have to be issued, with member states having two months time to react or endorse the commission's recommendations.

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