Excessive budget deficit: European Commission opens disciplinary proceedings

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Brussels is preparing to take disciplinary action against a dozen EU states for excessive government deficits. Already this Wednesday, June 19, the European Commission will publish reports on the economic and budgetary situation of each of the 27 countries of the European Union. Such countries as France, Italy, Poland, Hungary and others have fallen into the field of vision of the European executive power.

The Commission notes that in 2023, almost ten of them exceeded the limit in the annual budget deficit set by the Stability and Growth Pact of 1997. According to the agreement, it should not exceed 3% of GDP and public debt should remain within 60% of GDP. The European executive has repeatedly warned over the past months that it will launch proceedings this year against countries that violate budget agreements. So far they have been postponed until after 2020 because of the economic crisis linked to the COVID-19 epidemic and the war in Ukraine.

High deficits

The highest deficits in the EU last year were recorded in Italy (7.4% of GDP), Hungary (6.7%), Romania (6.6%), France (5.5%) and Poland (5.1%). In addition to these five countries, Slovakia, Malta (4.9%) and Belgium (4.4%) could also be subject to a disciplinary procedure, notes Andreas Eisl, an expert at the Jacques Delors Institute.

Spain and the Czech Republic exceeded 3% in 2023, but plan to return to the target this year. Estonia also exceeded 3%, but its public debt amounted to about 20% of GDP, which sets it apart from other commonwealth countries. The Commission's decision will be based on data for 2023, but will also take into account expected developments in 2024 and beyond, emphasizes Andreas Eisle.

The case of France is of particular concern. The country is currently experiencing a political crisis after the victory of far-right forces in the European Parliament elections, as well as E. Macron's unexpected decision to dissolve the National Assembly on June 9. Lending rates in Europe's second largest economy have suddenly risen, and the Paris financial center is acutely feeling the effects of political instability.

Far-right and left-wing oppositionists

The far-right and left-wing opposition, leading in the polls, plan to open the spending tap wide, but at the same time return to pension and labor market reforms recommended by Brussels. This could jeopardize Paris's promise to bring the budget deficit back below the 3% threshold by 2027. In fact, the state budget deficit in 2023 was 15.8 billion euros higher than the government had forecast (4.9%). This forced the government to cancel €10 billion of allocations for 2024.

"No comparable crisis justifies a public budget deficit for 2023," Budget Rapporteur General Jean-François Husson (Republican Party) said at a press conference in the Senate in mid-June. Socialist Claude Reynal criticized the "opacity of the budget message," saying it was unwise to cling all year to a deficit target of 4.9%, which had become unattainable.

Cross-party report

The Republican and Socialist Party lawmakers also presented a cross-party report denouncing the government's "recklessness" in allowing the budget slippage in recent months, as well as making recommendations for greater transparency in public finances. Responding to questions from the Senate, Economy Minister Bruno Le Maire denied any withholding. "All information was provided to Parliament and the French people in a timely manner and all necessary decisions were taken in time to correct the effects of lower than expected tax revenues," he said.

Introduced in 2022, the updated Stability Pact will impose financial sanctions of up to 0.1% of GDP a year on countries that fail to meet its requirements. For France, for example, they would amount to almost 2.5 billion euros. In reality, these sanctions have never been applied so as not to hit already struggling economies. Since the introduction of the euro, France has been under an excessive deficit procedure most of the time. However, since 2017, it has been out of this procedure. However, correcting the backlog will not be easy amid weak growth and the geopolitical situation in Europe. Public finances are strained to the limit to support Ukraine in the war against Russia, as well as investing in the green transition to fight global warming.

Jonathan Rowe

Jonathan Rowe

The creator and main author of the site is Jonathan Rowe. Trader and investor with many years of experience. A graduate of the Massachusetts Institute of Technology with over a decade of experience developing applications for financial and investment institutions.

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