20th Mar 2018

France offers new cuts to meet Brussels' demands

France and Italy outlined extra measures to cut their budget deficits on Monday as they backed away from a full scale confrontation with the European Commission.

French finance minister Michel Sapin announced new savings worth €3.6 billion in a letter to eurozone commissioner Jyrki Katainen.

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  • French leader Hollande with Germany's Merkel in Elysee palace (Photo: elysee.fr)

The extra savings would come from "lower interest expenses as a result of falling interest rates throughout the summer, or a reduction in future contributions to the European Union Budget announced by the EU budget commissioner."

The changes will have little effect on the overall deficit levels but will bring France closer to achieving a balanced budget in structural terms when adjusted to the economic cycle, a key demand of the commission.

Sapin's letter said that 0.5 percent of output would be trimmed from France's structural deficit in 2015, up from the 0.2 point improvement promised in the draft budget, but still short of the 0.8 percent cut requested by the EU executive.

Meanwhile, Italy promised to reduce its structural deficit by 0.3 percent.

"We welcome the constructive feedback that we've had", a Commission spokesman told reporters on Monday.

In 2013 France was given a two-year extension by the European Commission to bring its deficit in line by 2015, but abandoned the target earlier this summer on the back of sluggish economic performance.

France recorded zero growth in the first six months of 2014 and its economy is forecast to grow by 0.4 percent over the whole of 2014 and by 1 percent in 2015.

The budget tabled by Michel Sapin in September includes spending cuts worth €50 billion over the next three years, alongside payroll tax cuts worth €40 billion for businesses.

It forecasts that France's deficit will be 4.3 percent in 2015, and will not fall to the 3 percent threshold in the EU's stability and growth pact until 2017.

In Rome, meanwhile, Matteo Renzi's government pledged to find an additional €4.5 billion of savings, with €3.3 billion coming from a cash reserve that had previously been intended to fund tax cuts to help meet the EU budget requests.

A further €1.2 billion will be made from adjusting its spending plans,

France and Italy were the two most notable recipients of warning letters from Katainen last week.

Although Italy has kept within the 3-percent limit, its budget plan would take its deficit up to 2.9 percent. Four other EU treasuries also received requests for further budget savings.

Both countries also warned that further cuts would risk pushing them back into recession. Italian finance minister Pier Padoan said that "a fourth year of recession is to be avoided by all means as it would be extremely problematic to pull the country out of such an economic environment.”

For his part, Sapin commented that it was "imperative to adapt the pace of deficit reduction in Europe and France to the situation of very sluggish economic growth and very weak inflation".

Under the EU's economic governance regime, all 18 countries in the eurozone must submit their draft budget plans to the commission. The commission will decide on Wednesday whether any country is in "serious breach" of its budget rules and will then submit formal opinions to each government in November.

Failure to keep within the deficit limits can result in a fine of up to 0.2 percent of GDP.

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