Brussels to chide France over deficit as spending clash looms

Brussels is to reprimand France this week for breaching EU budget rules but is already bracing for a potentially far more serious clash with Paris should the far right or left take power.

The European Commission is preparing to open a so-called excessive deficit procedure against France on Wednesday for breaching the EU’s borrowing limit of an annual 3 per cent of GDP, a move that was largely telegraphed earlier this year.

Alongside France, the commission will open an excessive deficit procedure against six other countries: Italy, Belgium, Malta, Slovakia, Hungary and Poland, according to two people familiar with the commission’s decision.

The procedure is meant to nudge countries in breach to adjust course by requesting that they tighten fiscal policy. Refusal to comply can eventually lead to fines. France ran a deficit of 5.5 per cent in 2023 — the second-highest in the Eurozone after Italy.

The reprimand comes as France hurtles towards snap elections on June 30 and July 7. The far-right Rassemblement National is expected to win, according to opinion polls, with the leftwing alliance coming second. Both the RN and leftwing New Popular Front have made lavish spending pledges, although the RN’s exact commitments are vague.

The commission will follow Wednesday’s rebuke with instructions in the autumn to reduce spending once EU countries have submitted their multiannual spending plans for review, part of a reformed EU process.

Economists at Bruegel, a think-tank, estimate France will be told to reduce spending by about 0.54 per cent of GDP per year over the next seven years, about €15.7bn in 2024.

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Although such cuts this year are equivalent to about a third of France’s defence budget, the measures would be less demanding than what would have been required under the old EU rules.

EU officials doubt that a new French government will stick to the EU’s order to cut spending. The RN and NFP are promising a radical break with Emmanuel Macron’s pro-business economic policies and both have denounced the EU’s budget rules.

“It is a matter of concern because they need savings, and the platform of parties that look set to win are more on the spending side,” said an EU official. 

Marine Le Pen fought the 2022 presidential election promising spending increases and tax cuts worth €100bn a year, according to the Institut Montaigne think-tank. The RN has been much more vague in recent days about its plans, but said it would proceed with cutting value tax on energy and fuel, which the government calculated would cost €17bn a year.

The NFP, hastily assembled last week to try to stop a far-right victory, has promised to scrap Macron’s pension reforms, raise public sector salaries, increase housing and youth benefits and cut income tax and social security payments for the less well-off.

The programmes of the RN and NFP were “diametrically opposed” to Brussels’ request to reduce spending, said Lucio Pench, non-resident fellow at Bruegel, and a former commission official on fiscal matters.

“There is a risk of encountering something that we have always wanted to avoid: a head-on collision with a country that would put the commission in a difficult place.”

Silvia Ardagna, chief European economist at Barclays, said EU capitals had learned that it was “better to compromise with the commission than be crazy”. Even if Paris did not meet required spending reductions both sides could then “extend and pretend”.

“Obviously, this requires that whoever gets into government in France also understands this,” she said.

Investors fretting at the prospect of an RN-led government and populist left opposition have already been selling French bonds and equities.

The difference between French and German government bond yields, a measure of relative trust in French debt, has risen to levels unseen since the 2017 presidential election, when Le Pen still advocated scrapping the euro.

French finance minister Bruno Le Maire warned that far-left and far-right spending programmes would make it impossible to service France’s debt, ushering in financial turmoil. 

France’s debt ratio, at 110.6 per cent of GDP, is the third-largest in the Eurozone, after Greece and Italy. “With the projects of the far-left and the far-right, the debt cannot be financed,” he said on Friday.