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French budget plan not 'good enough': Euro bank

AFP/The Local · 2 Jun 2014, 16:35

Published: 02 Jun 2014 16:35 GMT+02:00

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The European Union's executive warned France on Monday that its efforts to fix public finances were falling short.

"Overall, the budgetary strategy outlined in the programme is only partly in line with the requirements of the Stability and Growth Pact," European Commission head Jose Manuel Barroso said on releasing policy recommendations for the EU's 28 member states.

The harshest spotlight of the report had been expected to be on beleaguered France, with the EU's second-biggest economy, which is struggling to reduce its public deficit while teetering on the edge of recession when recovery seems on a solid footing in much of the 28-member bloc.

France, like a majority of member states, is under so-called close supervision by the EU commission, after having missed Brussels-imposed budget targets. Paris has promised 50 billion euros worth of of budget cuts and reforms to get back in the EU's good graces.

Under EU rules, budget deficits -- the shortfall between income and spending -- should not be more than 3.0 percent of annual gross domestic product.

The 3.0-percent limit was set because it is estimated that European economies are not able to generate enough growth to support the costs of a higher deficit, which would just spiral higher.

Accumulated debt -- the sum of all those annual deficits -- is supposed to be kept at 60 percent of GDP or falling to that ratio.

But in 2013, France had a budget deficit of 4.3 percent and total debt at 93.5 percent compared with Berlin's zero and 78.4 percent.

Political price of austerity 

The austerity policies adopted to get to the  target has had a political price with France's far right National Front (FN) seizing a historic victory in European elections last week, which also saw unprecedented anti-establishment gains in Britain and Greece.

With the rise of eurosceptics, it is likely the Commission will choose a a more tolerant tone towards countries missing benchmarks and instead encourage France and the others to stay on the path of reform.

"The FN vote has created the view that we have to pay attention to France, that we must not add to its problems and not give the impression that France no longer counts," said one EU official.

Isolating France is notably a worry in Germany where Chancellor Angela Merkel, a strong backer of the EU's embrace of budgetary rigour, has been careful to laud the efforts made by embattled President Francois Hollande.

Hollande, in the wake of the stunning defeat to the FN, said that European leaders had to "heed what had happened in France" or face "other votes in France and elsewhere against Europe."

For now, the financial markets that precipitated the awful days of eurozone debt crisis, have remained largely calm, with only a subdued reaction so far to France's difficulties.

Story continues below…

But with a steady trickle of bad data, sentiment on the markets could very well turn.

On Monday, data showed only sluggish manufacturing activity for the eurozone last month, with a particularly poor performance in France.

France was the weakest of the eurozone economies covered by the surveys -- its PMI, or Purchasing Managers' Index, indicated that activity fell.

On Monday, Moody's credit agency warned of the fallout from last week's anti-EU vote.

"The rise of eurosceptic parties in France and Greece could prompt both governments to consider easing budgetary consolidation, which would address voters' austerity fatigue, but permit wider deficits than currently planned," the agency said in a note to clients.

AFP/The Local (joshua.melvin@thelocal.com)

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