EU Commission Warns France over Public Debt Levels

The European Commission Building in Brussels. Photo: Sébastien Bertrand for Wikimedia Commons

The European Commission Building in Brussels. Photo: Sébastien Bertrand for Wikimedia Commons

On Wednesday, April 10, the European Commission singled out France, issuing harsh warnings over serious public sector debt levels that could possibly weaken the entire Eurozone. A Commission report stated that high and increasing public debt is “reducing the capacity of public finances to face potential adverse shocks,” which could negatively affect the entire Union’s economy.

The European Commission and the French government both forecast a 0.1 percent growth this year, as well as a 1.2 percent rebound in 2014. The International Monetary Fund’s predictions are surprisingly even less positive. Dropping its original prediction of 0.3 percent growth, the IMF forecasts negative growth in France this year. In 2014, it does however expect the French economy to rebound with growth of 0.9 percent.

Contributors to the negative growth could be a combination of fiscal consolidation, poor export performance, and low confidence, the IMF’s chief economist Olivier Blanchard explains. In the Financial Times, Oddo Securities, the Paris broker, states, “France is the European country which has recorded the sharpest fall in business confidence over the past six months.” Such low confidence is another stumbling block to economic recovery and growth.

In response to the anemic growth, France must make more adjustments to lower the deficit, such as increased taxes and more spending cuts. President Hollande, however, does not support austerity measures, and believes “credibility, sustainability, and stability” is a better solution to the crisis. Hollande’s concern is that austerity could slow growth even further.

France, the second-largest economy in the EU, is a “core country — in terms of its size and its geo-economic position… Its health has a very direct impact on the overall health of the eurozone,” said EU Economic Affairs Commissioner Olli Rehn.

In conjunction with Germany’s growth of less than one percent, the recession in France may call into question the ability of the Eurozone core Member States to help those on the periphery. As the more stable States attempt to “save” those whose economies are struggling, they are in turn weakening their own economies. As a result, the Eurozone is weakened.

Hollande is seeking an extra year to meet the EU deficit targets, as the government is struggling to get the budget deficit under the mandated three percent of its GDP. Currently, France’s projected deficit is at 3.7 percent, and is not projected to reach the EU target until 2014, when it is expected to fall to 2.9 percent.

In the coming weeks, Paris will engage in talks with the European Commission, which, under new EU budgetary rules, can insist on changes to the plan. Fabrice Montagne, economist at Barclays in Paris, told the Financial Times, “It will be very interesting to see if they use this power in the French case.”

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