Stability and Growth pact: European Commission takes action against France’s budget deficit, April 2003

The European Commission has taken the first step in the 'Excessive Deficit Procedure' against France with the adoption of a report on 2 April 2003, which shows that France's budget deficit in 2002 exceeded the 3&percent; of GDP threshold permitted by Article 104(3) of the Treaty.

The report on the government finance situation in France reveals that the general government deficit reached 3.1&percent; of GDP in 2002 and notes that this is not expected to be temporary: the French authorities estimate that the 2003 government deficit may well reach 3.4&percent; of GDP. In addition, the general government gross debt in 2003 is also projected to rise above the Treaty reference value of 60&percent; of GDP. The European Commission also pointed out that the budgetary excesses could not be attributed to an unusual event outside the control of the French authorities nor to a severe economic downturn. France is already subject to a recommendation adopted by the Council in January 2003 giving early warning with a view to prevent the occurrence of an excessive deficit in 2003 but to date France has not taken sufficient measures to reduce the forecasted deficit. According to the European Commission if France fails to take action then by 2004 its budgetary deficit could have reached 3.6&percent;.

The French breach of the Stability and Growth pact, the rules laid down in Articles 103 and 104 of the Treaty to ensure the success of economic and monetary union, will reinforce concerns around the EU about the future of the pact. Many officials from eurozone countries have already criticised the pact for failing to provide enough flexibility for governments to adapt their economies to changes in the global economic situation. Germany and Portugal have already been warned by the European Commission for their excessive deficits. In response to these criticisms the European Commission adopted a Communication on 27 November 2002 proposing several changes to the Stability and Growth pact in an attempt to make it more acceptable to the Member States whilst strengthening economic policy co-ordination. The proposals are still being discussed by the Council.

In the meantime Pedro Solbes, European Commissioner for Economic and Financial Affairs, will be hoping that the French government will take remedial action rather than force the European Commission to take further measures. But Mr Solbes admitted to the Financial Times that the pact would be 'seriously damaged' if the eurozone's second biggest economy was allowed to get away with it. The European Commission believes that France's budgetary problems are largely home grown, caused mainly by tax cuts and overruns in government spending in 2002. Jacques Chirac, the French President, now faces a tough call: he must decide whether to renege on tax cuts promised in his election manifesto or risk destroying the remaining credibility of the stability and growth pact. If he opts for the latter then he risks further damaging the EU's image in the international arena, already severely dented by the different positions of European governments on the Iraq crisis.

The Economic and Financial Committee of the European Commission will provide an opinion on the content of the report within the next two weeks. The European Commission is subsequently expected to address an opinion to the Council who would then decide, on a recommendation from the Commission, whether an excessive deficit exists. In this case, at the same time, the Council would, on the basis of a recommendation from the Commission, make recommendations to France to bring its budgetary deficits back in line within a year. However if the situation persists, as European Commission's provisional figures indicate, the French government would face intensified measures applied by the Council, including sanctions.

Links:
European Commission:
	02.04.03:	Press Release: Commission adopts report on government finances in France as a first step of the Excessive Deficit Procedure [IP/03/471]
	DG Economic and Financial Affairs: Stability and Growth Pact
	Excessive deficit procedure
	Communication: Strengthening the co-ordination of budgetary policies [COM(2002)668]
	Progress of COM(2002)668 through the decision-making process
European Sources Online: Financial Times:
	03.04.03:	France 'could breach deficit rules for three years'
BBC News Online:
	02.04.03:	EU acts on French deficit
European Sources Online: In Focus
	Reforms to the Stability and Growth pact
	Germany and others warned over budget deficits, January 2003
	European Commission looks set to ease the rules of the Stability and Growth Pact, July 2002
	Stability and Growth pact: European Commission suggests postponing the deadline date for balanced budgets until 2006, September 2002

Helen Bower

Compiled: Thursday, 3 April 2003

The European Commission has taken the first step in the 'Excessive Deficit Procedure' against France with the adoption of a report on 2 April 2003.