French budget: a looming dilemma for Brussels?
STOXX 600 flat
Investors overlook French budget
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FRENCH BUDGET: A LOOMING DILEMMA FOR BRUSSELS?
France could be the perfect test case for new European budget rules, according to Erik-Jan van Harn, senior macro strategist at Rabobank, but he warns compliance with them is unlikely.
It's been an exciting few weeks across the channel, with new Prime Minister Michel Barnier's government unveiling its budget on Thursday. It features plans for 60 billion euros ($65.5 billion) of spending cuts and tax hikes focused on the wealthy and big companies, amid a spiralling fiscal deficit.
But Rabobank's van Harn is less than sanguine. He thinks the government is unlikely to survive until 2029 and a rating downgrade by one of the major rating agencies is likely.
And there are further reaching political considerations. France has to comply with new European budget rules, a feat the Rabobank strategist also thinks is unlikely.
Compliance would mean improving France's structural primary deficit by at least 0.5% annually from 2026 to 2031 until it lies comfortably below 3%, he says, and ensuring France's debt ratio drops by a yearly average of 1%.
Both are challenging, but the latter more so, says van Harn.
"Particularly now that inflation – and thus nominal GDP growth – is falling, it may be hard to bring down the debt ratio without severe austerity," he writes.
France's possible failure to comply with the rules could pose a dilemma for Brussels, he says.
"While Brussels could theoretically fine France for not sticking to the rules on time, it's a politically sensitive issue."
Such a move would require all the member state's finance ministers to agree.
"Tricky dynamics" are at play, says van Harn, pointing back in time to EU executive Jean-Claude Juncker's explanation for not fining France a few years ago.
The rationale? "Because it's France," said Juncker in 2016.
France's debt cutting plan is expected to reach Brussels by October 31.
(Lucy Raitano)
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