Brussels, 08/10/2003 (Agence Europe) - On Wednesday, to no surprise, "France has taken no effective action" in response to the EU Council of Ministers of the Economy and Finance Recommendations made to the country in June: France will not be bringing its public deficit to below the 3% threshold of GDP by 200, it did not reduce its structural budget in 2003 and it was not able to prevent any increase in its debt.
This new phase in the excessive debt procedure against a Member State will be completed when the Commission adopts a new recommendation on 21 October that will send Paris "a warning" to take, within a limited period of time, measures to reduce the deficit and subsequently rectify the situation. These two Commission recommendations will be discussed by the Ecofin Council on 4 November. It will be at this moment when the risk to do battle over the demands on France to put its house in order in a period of two months if it wants to avoid sanctions.
Five days after the expiration of the deadline set by the Council (3 October), the Commission will make a tough decision on France's action to reduce its public spending. the French authorities have taken a number of measures concerning the year 2003. ( the Commission considers that the French authorities decision to cancel credits in the State sector worth € 1.4 billion (0.1% of GDP) ensures the achievement of the planned expenditure objective in the State sector but does not secure a better outcome. According to the Commission, the three other decisions taken by the government (cancel the reimbursement of drugs with “insufficient medical service”; increase in taxes on tobacco and social contributions for AGS (this is a fund in charge of the payment of wages of workers in companies in bankruptcy. The last three measures will have a marginal impact on the 2003 general government deficit planned in June and requested by the Council.
The Commission is also worried about the recent upward revision of debt projections by the French authorities from 59.0% of GDP in 2002 to 61.4% of GDP in 2003; in June, it was expected to increase from 59.0% of GDP in 2002 to 60.5% of GDP in 2003. According to the Commission this is evidence that the French authorities did not take measures to limit the increase in the general government debt in 2003 as recommended by the Council in June.
The Commission does not provide a detailed calculation of the draft financial law for 2004. While pointing our that it had anticipated a minimum reduction of at least 0.5 percentage point of GDP for the following year, the Commission concludes that this improvement will not be sufficient to ensure that the nominal deficit will be below 3% in 2004, as was recommended in June. The draft Budget projects the nominal deficit to decline from 4.0% of GDP in 2003 to 3.6% of GDP in 2004.
On 3 June the Ecofin Council observed that the government deficit in France amounted to 3.1 per cent of GDP in 2002 and established the deadline of 3 October 2003 for the French government to take appropriate measures to this end: put an end to the excessive deficit situation by 2004 at the latest; achieve a significantly larger improvement in the cyclically-adjusted deficit in 2003 and to limit the increase in the general government gross debt to GDP ratio in 2003.
The Commission currently appears to be seeking to enter into a "you scratch my back and I'll scratch yours" kind of game with France. It will not call on the country to bring its public deficit below 3% of GDP in 2004 as it has accepted the argument of the disadvantageous economic situation. But in return, the Commission is calling on Paris to speed up structural reforms and reduce its structural deficit. France is now counting on a 0.7% reduction of GDP in its structural deficit and the Commission might ask the country to go as far as a 1% reduction in GDP. As discussions on Monday evening revealed at Eurogroup (EUROPE yesterday p 17), the Commission will have to find a balance between the position of France and its allies (Germany, Italy, Belgium and Luxembourg) and that of the Netherlands, Austria and Finland, which is demanding a strict application of the Stability and Growth Pact.