In 2019, Rome and Paris will have to focus on reducing their structural deficits in order to meet the requirements of the European Union's budgetary rules.
The announcement by Emmanuel Macron, the French President, on Monday evening, 10 December, of socio-economic measures to respond to the demands expressed during the ‘yellow vests’ demonstrations, raises questions about France's compliance with the budgetary commitments it has made at European level (see EUROPE 12157).
The questions are all the more acute as the European Commission is today negotiating with Giuseppe Conte's government on the Italian draft budget plan for 2019, after Rome presented two draft budgets plans that do not comply with the rules of the Stability and Growth Pact.
Some Italian leaders have made the link between the two issues. Luigi Di Maio, the Italian Deputy Prime Minister, even asked himself, on Tuesday 11 December, “whether the rules [were] the same for everyone".
However, the budgetary positions of the two eurozone countries differ, although they are both linked by the need to reduce the structural deficit (excluding cyclical effects) in order to comply with the rules of the preventive arm of the Pact.
Italy. The Italian draft budget plan for 2019 has already been rejected twice by the Commission. Rome is required to reduce its structural deficit by 0.6% of GDP per year, and both documents sent to the Commission forecast an increase of 0.8% of GDP in 2019. The Commission estimates that this increase would in fact represent 1.2% of GDP.
At the same time, on 21 November, the Commission presented a report on the debt under Article 126(3) of the TFEU, concluding that the budgetary path envisaged by Rome does not meet the public debt criterion with regard to the Treaties.
This report received a positive opinion from the Economic and Financial Committee of the Council of the EU, paving the way for a Commission recommendation to open the excessive deficit procedure on debt criteria.
Both sides are continuing negotiations, the Commission spokesperson said on Monday 17 December, and the Conte government could offer guarantees in the coming hours.
Laborious calculations have made it possible to recover budgetary margin Mr Conte said on Friday at the end of the European summit.
Postponing the implementation of the pension reform and a citizenship income until spring 2019 would make it possible to finance these campaign promises at a lower cost and reduce the nominal public deficit to 2% of Italian GDP. Italy also wishes to activate the flexibility of the Pact for its infrastructure investment programme in response to the Genoa motorway bridge disaster.
If guarantees are not provided for a reduction in the structural deficit, it is possible that the Commission will formally recommend to the EU Council on Wednesday 19 December that it open an excessive deficit procedure on the basis of the debt against Italy.
France. The French draft budget for 2019 was not rejected by the Commission on 21 November. However, the latter warned that the French budgetary trajectory presented a risk of non-compliance with the rules of the Pact.
According to the Commission, Paris will not reduce its structural deficit in 2018 (differential of 0.0% of GDP) and will only reduce it by 0.2% of GDP next year. However, under the rules of the Pact, France is expected to reduce its structural deficit by 0.6% of GDP next year.
The French government now forecasts that the measures announced by Mr Macron will cost 10 billion euros, and that next year's nominal deficit will be 3.2% of GDP.
As for the Commission, an appointment is now being made for next spring, when it will present its economic forecasts as part of the European Semester budget process. The European institution will then determine whether the measures in question only worsen the nominal deficit - such as the so-called one-off measure to transform the Competitiveness and Employment Tax Credit, which is expected to cost 0.9 percentage points of GDP in 2019 - or whether they will negatively affect the structural deficit.
In the latter case, the French budgetary trajectory would be problematic and could trigger the opening of the Significant Deviation Procedure with regard to the medium-term budgetary objectives.
On the other hand, if these measures only have an impact on the nominal deficit, two assumptions will apply. The deficit will be acceptable if it is between 3% and 3.5% of GDP. The rules of the Pact do indeed allow the threshold of 3% of GDP to be temporarily exceeded under the preventive arm. And the limit of 3.5% of GDP not codified is an informal 'case law' of the Commission, already applied for Greece and Belgium.
On the other hand, if the nominal deficit exceeds 3.5% of GDP, an excessive deficit procedure could be opened against France, which finalised a long nine-year procedure in 2018. (Original version in French by Lucas Tripoteau)