Monday

29th Aug 2016

Analysis

France falls victim to EU's economic powers

  • The European Commission report highlights the limits of France's say over its budgetary policies (Photo: francois hollande)

Being singled out for censure by the European Commission is nothing new for the government of Francois Hollande. But the timing of the latest veiled threat from Brussels could hardly be worse.

Ten days ago Marine Le Pen's National Front won a decisive victory in France's European elections on a campaign platform that called for France to scrap the euro. Now the EU executive is insisting that France must make additional cuts and reforms to meet its budget commitments.

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  • Paris was given a two-year extension last May to reach the 3 percent threshold (Photo: Quinn Dombrowski)

The stark language may ruffle feathers in Paris but the Commission's recommendations should not come as a surprise. The macro-economic imbalance procedure rules are clear: if a country consistently fails to address economic reform "the gravity of imbalances can eventually lead to the imposition of sanctions on euro area member states" and the re-written economic governance framework agreed in 2011 and 2012 makes it easier for the commission to impose reforms.

The recommendations are automatically adopted unless a majority of governments oppose them. The principle is known as reverse qualified majority voting and is hard-wired through the new governance rules to prevent governments from repeating the tactics used by Germany and France in 2003 of simply refusing to implement reforms.

France is hardly the only country to regard the new rules as both politically irritating and economically suspect.

Italian prime minister Matteo Renzi has indicated that he will use his country's six month EU presidency to push for the budget rules to be temporarily loosened for governments who implement growth-fostering reforms such as public investment in infrastructure or research and innovation.

However, the idea of having an investment 'golden rule' in the regime was proposed by centre-left parties back in 2011 and rejected by a German-led majority of conservatives.

And with Europe's political landscape still dominated by conservatives and liberals, a re-write is hardly likely, even if the eurozone's second and third largest economies team up in protest.

There is some sympathy for France's predicament, coupled with an awareness of the country's importance to the eurozone. In private, commission officials describe France as being the main threat to the future stability of the currency bloc.

But having given Paris a two-year extension just last May to reach the 3 percent threshold, the commission is unlikely to repeat the move.

With a debt pile that is worth around 95 percent of GDP, an unemployment rate of 10 percent and rising, little to non-existent growth, and a budget deficit that stubbornly refuses to fall fast enough, France is trapped in a vicious spiral.

Having promised to prioritise tax rises rather than cuts to public spending in his attempts to balance the books, Hollande is now being told by Brussels to slash taxes on businesses and individuals and make further cuts to health spending and pensions.

This is itself a demonstration that, when it comes to deficit reduction, the EU's new rules explicitly prioritise spending cuts over tax rises.

Meeting these demands would be a tough ask at the best of times, let alone for a President whose personal ratings are at a record low and whose party was reduced to under 15 percent of the vote in the European election.

Successive French presidents have shied away from pension reform. Hollande actually increased the number of years that workers must pay into state pension schemes from 41.5 to 43 years last year, a move which prompted demonstrations on the streets of Paris, but was derided by EU economic affairs commissioner Olli Rehn as "a reform à la française".

"The pension reform will not suffice to eliminate the system's deficit" and "will only halve the system's total deficit to some 0.5% of GDP by 2020," the Commission states.

Elsewhere, the Commission report takes aim at France's tax system and its social and welfare benefits.

"Sizeable short-term savings cannot be achieved without reducing significantly the increase in social security spending," states the report by the EU executive, adding that this "implies curbing healthcare and pension costs, for example through setting more ambitious annual healthcare expenditure targets and temporarily freezing pensions".

Meanwhile, the Commission also wants France to cut its "high and rising overall tax burden," noting that "in 2013, the tax-to-GDP ratio stood at 45.9 percent, one of the highest in the EU and up by 3.3 percent since fiscal consolidation started in 2010".

Although the 'six pack' rules allow the Commission to impose a fine of up to 0.2 percent of GDP on repeat offenders, France is unlikely to be fined any time soon – no commissioner, even a fiscal conservative like Olli Rehn, would make such a politically reckless move.

But the symbolism of censure is just as damaging. The French government does not control its own budgetary policy, let alone its economic future.

"Our people demand one type of politics: they want French politics by the French, for the French, with the French. They don't want to be led any more from outside, to submit to laws," Le Pen told her supporters at a rally following her European election triumph. Now she has another political gift.

Italy earthquake is test for Renzi

Italian prime minister is expected to present a quick reconstruction plan and request more budget flexibility from the EU after this week's tragic earthquake.

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