Brussels has laid out the scale of the task facing new French president Emmanuel Macron to balance France’s troublesome public finances as it warned that Paris’ efforts to rein in spending would prove more difficult than previously thought.
In its latest economic forecasts published today, Brussels increased its estimate of France’s budget deficit for every year from 2016-2018. It forecasts the county would just fall in line with 3 percent ceiling this year, a downgrade from an earlier projection of 2.9 per cent, before swelling again to 3.2 per cent in 2018. This was also raised from 3.1 per cent.
Brussels said the deteriorating public finances reflected lower than expected government tax and social security receipts and higher spending on education, security, and civil servant salaries. The commission also warned rising inflation will make it harder the French government to comply with domestic rules that cap state spending representing a “risk to the forecast.”
Mr Macron’s stunning win in the presidential elections has been swiftly followed by calls from Brussels for budgetary prudence. Jean-Claude Juncker, the commission’s president, has already weighed in with calls for France double down on its belt-tightening efforts, telling an audience in Germany on Monday that “the French spend too much money and spend it on the wrong things.”
In contrast to his main presidential rivals, Mr Macron’s manifesto promised to bring France’s deficit under the 3 per cent ceiling as early as this year. The commission’s forecasts throw those ambitions into doubt as they forecast total government spending will be higher than it estimate in February. Total expenditure will hit 56.2 per cent of GDP in 2018 – the joint highest in the eurozone while debt will climb to 97 per cent of GDP.
Pierre Moscovici, EU economics commissioner and a former French finance minister, said Brussels was not aiming to put the new Macron government under fresh pressure and would not escalate its actions with potential financial fines.
“The three percent [deficit target] is within reach”, said Mr Moscovici, who allayed signs of impatience in Brussels after France has consistently missed its targets since the 2008 financial crisis.
“I really hope France seizes this opportunity”, he said. “Give Macron a chance”.
As well as gloomier predictions for 2017 and 2018, the commission also increased its estimate of the size of France’s 2016 budget deficit from 3.3 to 3.4 per cent. Its GDP forecasts remained unchanged.
Brussels made clear the numbers do not take into account any of the new president’s plans, which include slashing spending on public administration and an investment led jobs-programme.
The worsening French deficit numbers contrast with a generally improving economic outlook for the eurozone economy which is enjoying is best period of growth since the bloc’s debt crisis hit seven years, according to a series of private sector surveys.
Overall GDP growth is expected to come in a 1.7 per cent this year, a slight upgrade from an earlier forecast of 1.6 per cent and accelerate to 1.8 per cent in 2018.
With a brightening world economy supporting the continent, the Commission said risks to the eurozone’s outlook were more balanced but remained skewed to the downside.
A steadily falling unemployment rate has been hailed as one of the most impressive parts of the current upturn, with the Commission predicting the jobless rate will slip below 9 per cent for the first time in nearly a decade in 2018. It currently stands at an eight year low of 9.5 per cent.
Amid high-profile criticism from the US administration over Germany’s over-sized trade surpluses, the Commission forecasts a significant reduction in the country’s current account surplus from record levels in 2016.
The forecasts suggests Germany’s current account will decline from 8.6 per cent in 2016 to 7.6 per cent in 2018 driven by higher domestic spending in the eurozone’s largest economy. Berlin’s prized budget surplus – the difference between what the government spends and earns in taxes – will also shrink from a 0.8 per cent surplus to a broadly neutral 0.3 per cent in 2018.
Italy however is set to remain a concern for EU officials, staying on the sidelines of the broader recovery despite an overall brightening in the eurozone’s fortunes this year.
The Italian economy, the eurozone’s third largest, will be the slowest growing in the 19-country bloc this year, at 0.9 per cent – unchanged from 2016 – while its debt ratio will grow to peak at 133.1 per cent. Unemployment will remain stubbornly above 11 per cent over the forecast horizon, stretching out to 2018.
Italy is set to hold an election over the next 12 months to replace an interim government put in place following the resignation of prime minister Matteo Renzi in December. The country’s anticipated state restructuring of bank Monte dei Paschi is still awaiting the green light from the Brussels.
“Political uncertainty and the slow adjustment in the banking sector represent downside risks to Italy’s growth prospects”, said the Commission.
Brussels also warns that key economic indicators for Greece have worsened since its last forecasts in February – a consequence of delays in getting an agreement between euro area governments and the International Monetary Fund on agreeing the next stages of the country’s bailout programme.
After stagnating in 2016, Greece’s economy is is now expected to grow 2.1 per cent in 2017 and 2.5 per cent in 2018 – a sharp revision downwards compared with the 2.7 per cent for 2017 and 3.1 per cent for 2018 estimated in the commission’s February forecasts.
Having had a more pessimistic outlook on the UK’s growth rate compared to the Bank of England, the Commission bumped up its 2017 growth forecast from 1.5 per cent to 1.8 per cent, and 1.3 per cent from 1.2 per cent in 2018.
Britain’s economy will be helped along by an export boost from a weaker pound, said Brussels, but made no mention of the UK’s Brexit negotiations.
The commission also raised doubts about Donald Trump’s plans to revive US growth, with Mr Moscovici noting the world’s largest economy was already “maxed out” before Mr Trump’s prospective corporate tax cuts and spending rises.
The impact of the new White House policies will be “fairly modest”, said Mr Moscovici.
Malta will come in as fastest growing eurozone economy this year, expanding 4.6 per cent, followed by Luxembourg (4.3 per cent) and Ireland (4 per cent).