The European Commission recently announced disciplinary steps against seven EU countries for running excessive budget deficits. The countries singled out are France, Belgium, Italy, Hungary, Malta, Poland, and Slovakia. These deficits are primarily attributed to the impact of the COVID pandemic and the energy price crisis following Russia’s invasion of Ukraine in 2022.
France’s Budget Deficit
France, as the EU’s second-largest economy, is under particular scrutiny due to its budget deficit. In 2023, the country had a budget deficit of 5.5% of GDP, which is expected to decrease slightly to 5.3% in the current year. However, this figure remains well above the EU deficit limit of 3% of GDP. Additionally, French public debt stood at 110.6% of GDP in 2023 and is projected to increase to 112.4% this year and 113.8% in 2025, nearly double the EU limit of 60%.
The European Commission will engage in discussions with France on how quickly the country can reduce its deficit and debt levels. The EU executive arm is expected to propose a seven-year path to guide France in putting its debt on a downward trajectory. It is essential for the French government, regardless of the outcome of the upcoming national elections, to collaborate with the Commission to establish a medium-term strategy aligned with the new Stability and Growth Pact.
Potential Challenges
With the far-right National Rally party of Marine Le Pen leading in polls, there is a possibility of a euro-sceptic government in France. This party advocates for policies such as lowering the retirement age, reducing energy prices, increasing public spending, and implementing a protectionist “France first” economic agenda. Such a shift in governance could lead to difficulties in reaching consensus on challenging spending cuts, potentially resulting in a higher deficit than forecasted.
Investors have already displayed apprehension regarding the political uncertainty in France. Last week saw a significant sell-off of French assets, with bond yields experiencing the largest weekly surge since 2011 and bank stocks plummeting. This market reaction underscores the concerns surrounding the country’s public finances and the potential impact of political instability on economic stability.
The European Commission’s decision to propose disciplinary measures against France and six other EU countries highlights the ongoing challenges posed by excessive budget deficits. The need for fiscal discipline, cooperation with EU institutions, and adherence to established frameworks becomes paramount in ensuring economic stability and growth within the European Union. France, in particular, faces a delicate balance between addressing its budgetary concerns and navigating a shifting political landscape that could have far-reaching consequences for its economic outlook.