Defiant France tests EU resolve on budget rules

15th October 2014, Comments 0 comments

France and the EU headed Wednesday for a showdown with deficit-ridden Paris under threat of having its 2015 budget humiliatingly rejected.

The 18 members of the eurozone have until midnight to submit their draft budgets to the European Commission and all eyes are on France, considered the new "sick man" of an increasingly unhealthy Europe.

France announced last month that next year's budget deficit -- the shortfall between revenue and spending -- will hit 4.3 percent of annual economic output, far above the 3.0-percent ceiling set by the EU for member states that it had pledged to meet in 2015.

The French government said that the deficit would not drop to this level until 2017.

President Francois Hollande said recently that France would not introduce any extra budget rigour.

The European Commission, the EU's executive authority, has two weeks to decide whether the budget breaks the rules.

The Commission has newly acquired powers to enforce the deficit limit, and could send the budget back to Paris in an unprecedented demand by Brussels for changes to a national spending plan.

But failure to reach a compromise rapidly could alarm financial markets and cause a major political crisis.

Theoretically, France could end up with a heavy fine, but this is widely considered to be extremely unlikely.

French officials said the budget sent to Brussels would not deviate from the already announced numbers, setting up a major test of the EU's resolve to apply the rules to the bloc's second-biggest economy and a founding member.

Recession-hit Italy is also under the EU microscope.

The budget tensions come against a backdrop of global concerns that the eurozone's stagnating economy could slip back into a triple-dip recession, with effects worldwide.

- Germany is key -

It is not yet clear what tack the Commission will take in answer to France's defiance, but the role of Germany, the EU's most powerful country, will be key.

Berlin has voiced concern that the French economy may slip further.

Germany is thought to be working behind the scenes to give Paris a way to avoid disgrace at the EU, while also securing a far firmer commitment to reform, notably on relaxing French job protection.

Hollande's government, which is hugely unpopular and faces the growing influence of the extreme right, has hit back hard at pressure to do more to respect the agreed eurozone budget rules.

"We decide the budget," Prime Minister Manuel Valls said on Saturday as he warned his European partners to "respect France, a big country."

Those words riled some EU countries which are concerned that France will benefit from a double standard, with smaller countries facing Brussels' wrath even as big countries benefit from being seen as too big too fail.

"There can be no favouritism, the rules are the same for everyone," Spanish Economy Minister Luis de Guindos said on Monday.

"At first look, this budget is an insult by France to the Commission and its EU partners," said analysts from ODDO securities trading house in Paris.

Analysts predicted France will put forward "extremely technical" arguments.

These will centre mainly on the "exceptional circumstance" of extremely low inflation that has gripped France and the 18-country eurozone as a whole, they said.

Capital Markets in London said that the submission of a budget flouting EU rules "will be a key test of EU authorities' resolve".

It said "we expect a compromise to be reached that forces slightly more austerity onto France but also hastens the pace of vital labour market reforms."

At a meeting of eurozone ministers on Monday, French Finance Minister Michel Sapin hinted that EU-friendly amendments could be made in the French parliament which is currently reviewing the budget.

"Thankfully" there is still "plenty of room for positive discussion" in the French parliament, Sapin said, noting that debate there could run until December.

© 2014 AFP

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