France on collision course with Brussels over budget

The French National Assembly began debating the 2015 draft budget yesterday. Paris will send the same text to the European Commission today.

For at least the next two weeks, President François Hollande will be caught in a vice between the French left, who claim the budget is “unjust”, and his European partners, who are losing patience with France’s refusal to make deeper spending cuts or undertake genuine structural reforms, particularly of the labour market.

In France’s defence, Mr Hollande says that low growth and low inflation have created “exceptional circumstances”.

The president of the euro group, Jeroen Dijsselbloem, has been the most vocal critic of the draft budget announced on October 1st. France was already granted a two-year postponement to comply with the 3 per cent deficit ceiling, Mr Dijsselbloem noted. Now Mr Hollande has unilaterally announced another two-year postponement, until 2017.

“How was the postponement used?” Mr Dijsselbloem asked on October 9th. Since France had not used the grace period to enact reforms, “we should not do it again”, he added.

Paris foresees a budget deficit of 4.3 per cent in 2015, only 0.1 per cent less than this year.

Many of the cuts totalling €21 billion in the draft budget remain vague. For example, between €2 billion and €3 billion in cuts from social expenditure have not yet been detailed. And the government bases its predictions on a 0.7 per cent increase in demand – pure wishful thinking, experts say.

Tax credits

The budget exempts nine million French households in the lowest tranche from income tax, at a cost of €3.2 billion. It foresees tens of billions of euro in tax credits for business.

Other Europeans, particularly those who have made sacrifices to comply with the EU’s stability and growth pact, are frustrated. “The rules must be the same for everyone,” Austrian finance minister Hans Jörg Schelling said on Monday. “Every country must put its own house in order, as Austria did.”

To make matters worse, Paris has sent mixed signals in the run-up to the EU budget deadline. Prime minister Manuel Valls and economy minister Emmanuel Macron have repeatedly made social democratic, market-friendly statements about reforming the French labour market, only to be disavowed by the Élysée at the first sign of protest.

At the same time, ecology minister Ségolène Royal caved in to pressure from lorry drivers and annulled the "écotaxe" , at a cost of €1.4 billion in lost revenue.

France’s attitude has aggravated tension with Brussels. Cabinet ministers often evoke economic sovereignty. “France must be respected. It is a great country. I do not accept lessons in management,” Mr Valls said.

“There is no evidence they can point to of structural reforms,” a high-ranking European diplomat said. “There’s an element of being provocative.”

The EU has never carried out a provision for sanctions against members who violate the stability and growth pact, but France may face a severe reprimand from Brussels this autumn.