Brussel’s economy chief warned French President Emmanuel Macron on France’s economy (Image: Christophe Morin/IP3/Getty Images)
The new measures, announced in an effort to quell a civilian-led uprising against the French government, are expected to cost around 10 billion euros and dig a hole in France’s finances. The bloc’s executive arm “will closely monitor the impact of the announcements made by President [Emmanuel] Macron on the French deficit and any financing arrangements,” the economic affairs commissioner told AFP. He said: “We are in constant contact with the French authorities.”
His remarks came as France is expected to breach the European Union’s deficit rules next year after Mr Macron caved in to a wave of violent protests against him.
The French leader on Monday announced wage increases for the poorest workers and a tax cut for most pensioners in an effort to defuse a month-long public rebellion against rising living costs, which has morphed into the most serious crisis of his presidency.
The young centrist is hoping his concessions will pacify low-income households in rural France who have taken to the streets to denounce the government’s liberal economic policies, which they say benefit the wealthy and hurt the poor.
But under rules that underpin the euro common currency, France is obliged to keep its budget deficit under 3.0 per cent of gross domestic product (GDP), something it repeatedly failed to do until 2017.
The measures, however, will leave a 10 billion euro (8.64 billion pounds) hole in the Treasury’s finances, possibly pushing France back over the deficit limit.
Prime Minister Edouard Philippe told parliament: “We are preparing a fiscal boost for workers by accelerating tax cuts so that work pays. That inevitably has consequences on the deficit.”
Mr Philippe did not elaborate on the impact of the concessions on public finances or possible spending cuts, but insisted that the government would aim to keep spending from increasing.
Société Générale economist Michel Martinez warned in a research note: “Under all likelihood, the 2019 public deficit will print above the 3.0 per cent benchmark.”
EU Economic and Financial Affairs, Taxation and Customs Commissioner Pierre Moscovici (Image: Thierry Monasse/Getty Images)
The overall deficit was previously expected to be 2.8 per cent, but the new underlying deficit risks pushing the overall number towards 3.4 per cent.
But asked whether the budget deficit would be kept below the EU limit, an Elysée official said France had some wiggle room on spending if a one-off tax rebate, which inflates its deficit by 20 billion euros in 2019, was ignored.
Under EU fiscal recommendations France was required to reduce its 2019 structural deficit, which excludes one-off measures, by 0.6 per cent of GDP.
The Macron government had also committed to a 0.2 per cent structural improvement.
France is expected to breach the European Union’s deficit rules next year (Image: ERIC FEFERBERG/AFP/Getty Images)
But the French budget for next year had been already judged at risk of non-compliance by the commission last month, before Mr Macron’s planned conciliatory measures.
Any failure to respect the EU deficit ceiling could shatter France’s fiscal credibility with its European partners.
French media suggested on Tuesday that a 3.5 per cent deficit would complicate the discussion in the euro area and give other debt-ridden countries such as Italy an argument for a higher deficit.
And any sign of leniency from Brussels could complicate the commission’s heated discussions with Rome – which is facing the risk of a disciplinary procedure for its excessive debt – about keeping its deficit down.
Prime Minister Edouard Philippe (Image: Aurelien Meunier/Getty Images)
But Valdis Dombrovskis, the commission’s vice president, brushed off the claims, saying that the French case was very different from Italy’s.
Mr Moscovici echoed his comments, saying in a separate interview with the French daily Le Parisien published on Wednesday that Brussels could allow France to go beyond the 3.0 per cent limit and escape sanction so long as the breach of EU rules was “limited, temporary and exceptional”.
Italy’s Deputy Prime Minister Luigi Di Maio, for his part, said Paris should be subject to the same treatment as Rome.
Italy’s Deputy Prime Minister Luigi Di Maio said that Paris should be subject to Rome’s treatment (Image: Ivan Romano/Getty Images)
Valdis Dombrovskis said that the French case was very different from Italy’s (Image: GEORGES GOBET/AFP/Getty Image)
Mr Di Maio said: “If the deficit/GDP rules are valid for Italy, then I expect them to be valid for Macron.
“Europe is getting a lesson in humility from the French… From what Macron said it is clear the French deficit will need to be recalculated, and that makes France a problem.”
The commission earlier this year rejected Italy’s draft budget, which envisaged a deficit of 2.4 per cent of GDP in 2019, up from 1.8 per cent this year.