EU Sees France’s Fiscal Path as Compliant With Budget Rules
(Bloomberg) -- The European Union has told France its plan for slower deficit reduction next year is still within the bloc’s rules, handing Francois Bayrou ’s government a reprieve in its battle to repair creaking public finances.
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France aims to bring the deficit within 3% of economic output by 2029, but with a smaller effort this year after the government of Michel Barnier was toppled as it tried to push a stringent budget through parliament.
The revised trajectory in the updated medium-term fiscal plan is judged to still be compliant with the bloc’s rules, according to people familiar with the matter. France had requested the assessment this week from the European Commission, the EU’s executive arm.
The opinion is a source of relief for Bayrou’s government as it struggles to find a way to rein in the deficit that can both restore investor confidence and find support in a hostile, divided National Assembly.
On Thursday, Bayrou already notched up some political progress on when he survived a no-confidence vote with both the far-right and the Socialists, who joined up to push out his predecessor, abstaining.
The political upheaval of recent months and doubts over France’s finances as the deficit ballooned to 6.1% of economic output have contributed to market selloffs that drove up the country’s borrowing costs relative to peers.
The gap between French and German 10-year yields, a closely-watched risk gauge, rose above 88 basis points in December, around twice the level before snap elections in June last year. On Friday, it was set to fall the most on a weekly basis since October at 78, from 82 a week ago.
French Finance Minister Eric Lombard, who will meet with EU peers Monday in Brussels, said earlier Friday that the abstention of Socialist lawmakers in the no-confidence vote indicates it will now be possible to have a budget.
The French finance ministry declined to comment on the EU’s validation of the new fiscal trajectory.
Lombard’s plan foresees a reduction in the deficit to 5.4% of economic output in 2025, while the previous government had planned a bigger step to 5%. Until France can adopt a full budget for this year, it is reliant on emergency stopgap legislation to avoid a shutdown.
Still, the Socialists have warned that they could still censure the government, notably if Bayrou stumbles in his pledge to revisit a 2023 law that raised the minimum retirement age to 64 from 62.
Any changes to the pension system could also affect the EU’s assessment of France’s fiscal plans as the reform was cited among reasons for granting the country more leniency on its budget deficits.
France’s fiscal difficulties in recent months have made it an outlier in the EU as most other countries are making progress in closing deficit after huge spending during the Covid and energy crises.
Speaking at the French senate earlier this week, the governor of the Bank of France, Francois Villeroy de Galhau, said it is essential for the government to give precise details on savings it intends to make and ensure effective implementation.
“In the last two years, our country has alas seen large gaps in execution that have harmed our credibility in Europe,” he said.
--With assistance from Alice Gledhill.
(Updates with background, market reaction, no comment from finance ministry from third paragraph)
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