On Wednesday 22 November, the European Commission unveiled its opinions on the 18 draft 2018 budgets sent to it by all of the Eurozone countries with the exception of Greece.
In particular, the European institution takes the view that the French draft contains a risk of non-compliance with the rules of the ‘preventative’ arm of the Stability Pact, whereas France was supposed to end its excessive deficit in 2018 and come out of an excessive deficit procedure in place against it since 2009.
France. For 2018, although the government deficit is expected to be less than 3% of GDP in nominal terms, there is a risk of non-compliance for the French budget in terms of the structural effort (not including cyclical effects) concerning the medium-term structural adjustment trajectory and respecting the debt criterion, the Commissioner for Economic and Financial Affairs told the press. For 2017, the improvement of the structural budgetary balance is likely to be 0.2% of GDP, rather than 0.9% agreed upon, according to the Commission’s opinion.
On Wednesday, the French government stressed that the draft finance bill 2018 provided for a budgetary consolidation effort within the range provided for by the European rules and that the difference in assessment with the Commission was normal at this stage in the year and likely to be reabsorbed once the definitive figures are announced. For 2017, Paris stresses that the European institution has not taken account of the exceptional fiscal measures to compensate for the cancellation of the 3% dividend tax.
Spain. Despite the uncertainty related to the Catalan crisis, Spain gets the Commission’s blessing for its draft 2018 budget, which assumes the status quo, and which the Commission feels is broadly in line with the requirements of the pact. Like France, Spain will come out of excessive deficit procedure, but its deficit in nominal terms could be slightly higher (2.4%) than the 2.2% initially agreed upon.
Countries in compliance with the pact. All of the other Eurozone countries are in the ‘preventative’ arm of the Stability Pact. According to the Commission, six-member states (Germany, Lithuania, Latvia, Luxembourg, Finland and the Netherlands) have presented a draft 2018 budget that complies with the European budgetary rules. Five others (Estonia, Ireland, Cyprus, Malta and Slovakia) have submitted draft budgets that are broadly in line with the pact. Even so, for these countries, there could be a discrepancy between their medium-term objectives or adjustment trajectories and achievement of these objectives.
Countries at risk. On the other hand, the draft 2018 budgets of the other five countries (Belgium, Italy, Austria, Portugal and Slovenia) present a risk of non-compliance with the pact. In particular, there could be a considerable gap concerning the adjustment trajectory towards the medium-term objective.
Belgium and Italy may also fail to meet the government debt reduction criterion. In 2017, the indebtedness of these two countries is expected to be 103.8% of Belgian GDP (102.5% in 2018) and 130.8% of Italian GDP (130.0% in 2018).
Italy. In the case of Italy, the ongoing high government debt is a cause for concern, the Commission stresses. In a letter to the Italian authorities sent the same day, it acknowledges the budgetary consolidation effort already made, as the deficit in nominal terms has already fallen from 5.3% of GDP in 2009 to 2.5% in 2016 and, potentially, 2.1% in 2017.
However, forecasts on the level of the Italian debt point to several risks, such as lower economic growth, insufficient privatisation, the accountancy treatment of support to the banking sector and the payment arrears of the public administration. Given the size of the Italian economy, this situation is a cause for concern for the entire eurozone, the Commission argues. It stresses the importance of not watering down the key budgetary measures of the 2018 draft and, in particular, not backpedalling on the agreed pensions reform, with general elections to be held in Italy in the first half of next year.
The Commission will reassess Italy’s compliance with the debt reduction criterion in spring of 2018.
Romania. The European institution has furthermore established that no effective budgetary action has been taken in Romania. It proposes that the Council send the country a revised recommendation, with a view to the Romanian authorities taking the necessary measures to carry out a structural budgetary adjustment of 0.8% of GDP in 2018. This is reasonable given the strong economic growth in Romania, Moscovici stressed.
Finally, the Commission recommends that the excessive deficit procedure against the United Kingdom be closed on the day on which the British government presented its own 2018 budget. This reduces the British growth forecast from 2% to 1.5% in 2017 and 1.4% in 2018, plus a special envelope of £3 billion to prepare the country for Brexit.
For more information on the draft 2018 budgets of the Eurozone countries, see: http://bit.ly/2hU7sja . (Original version in French by Mathieu Bion)