FILE PHOTO: A general view shows the illuminated Eiffel Tower (L), the Hotel des Invalides (R) and rooftops at night in Paris, France, November 28, 2016. REUTERS/Charles Platiau/File Photo - RTX2YYPV
France's budget deficit is on course to hit 3.1% of GDP in 2018, according to European Commission forecasts © Reuters

France’s next president faces having to immediately implement austerity measures to avoid breaching EU budget rules, the European Commission warned in its winter economic forecasts on Monday.

In its last set of projections ahead of France’s first-round presidential contest in April, Brussels noted that the French budget deficit is on course to hit 3.1 per cent of gross domestic product in 2018, just exceeding the euro area’s agreed 3 per cent limit. There is also a risk that the deficit could breach the limit this year.

Public expenditure in France is set to be pushed up by measures including higher wage increases for civil servants and increased healthcare costs, the commission said.

French governments under former president Nicolas Sarkozy and successor François Hollande have failed to stick to the deficit targets. France, the largest economy in the eurozone after Germany, last fell below the 3 per cent ceiling in 2007. In 2015 it was given extra flexibility to meet the EU’s accepted deficit ceiling by 2017.

The question of whether Paris should seek to stick to EU budget rules or instead fight to change them has become one of the big faultlines in the presidential race to succeed Mr Hollande.

While independent candidate Emmanuel Macron, a former economy minister, has defended the restrictions as a source of budgetary credibility, they are a bête noire for more radical candidates on the left.

Meanwhile, the far-right Marine Le Pen has vowed to rip up EU spending rules, taking France out of the eurozone and embarking on a huge spending programme.

The issue has fed into broader questions of how to transform the country’s economy. François Fillon, candidate for Les Républicains on the centre-right, has made some of the boldest suggestions for spending cuts, advocating a “Thatcherite” blitz of reforms that include €110bn of savings (equivalent to 4.2 per cent of GDP) by 2022 and a cap on unemployment benefits.

In Brussels, Pierre Moscovici, the EU’s economy commissioner, said the budget targets were a sign of “political credibility” for any new French government. “My humble recommendation to the candidates is to continue [the current trajectory]”, Mr Moscovici, a former French finance minister, said. “The economic and political credibility of the country will be reinforced.”

The forecasts also offered some worrying reading for Italy, which is in the middle of difficult negotiations with Brussels over steps to reduce its mountainous debt load. The commission estimates Italy’s public debt increased to a record 132.8 per cent of GDP in 2016, and will increase again in 2017.

Failure by Rome to make enough structural effort to rein in its debt would, under EU rules, limit the scope for Brussels to be flexible in how it applies budget rules to the eurozone’s third largest country.

Mr Moscovici rejected any idea that an “ultimatum” had been given to Rome over its growing debt pile. Brussels has the power to impose sanctions on member states in persistent breach of its framework.

The EU also raised its estimate of the UK’s economic growth, acknowledging that its early estimates after June’s Brexit vote had overestimated the economic hit. The commission expects growth of 1.5 per cent this year, compared with a November estimate of 1 per cent.

Mr Moscovici said Brussels “must acknowledge” that UK growth had been “more resilient than was anticipated”.

Despite the better performance, Brussels’ economists warned that the effects of the UK’s vote to leave the EU would kick in during the later part of 2017, as higher inflation pinches consumer spending.

In the immediate aftermath of Britain’s referendum the commission forecast that a “mild” Brexit scenario would produce a 0.9 percentage point blow to GDP, reducing growth from 1.9 per cent to 1 per cent in 2017.

The latest figures show those numbers were pessimistic. Growth is expected to reach 1.5 per cent in 2017.

Despite the upgrade, the EU’s figures remain far below those of the Bank of England, which expects economic expansion to come in at 2 per cent. The BoE has also rowed back from its initial predictions of a sharp post-Brexit slowdown, revising up UK growth twice in the last three months.

Overall, eurozone growth would come in at 1.6 per cent this year, slightly slower than 2016’s 1.7 per cent, said the commission, as the bloc’s recovery has remained resilient to several political and security shocks.

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