It’s a showdown that has been coming for a while.
The French government Wednesday set out new budget plans for the next three years, baldly stating that its deficit will be a lot wider over the period than it promised its Eurozone partners.
At a news conference in Paris, Finance Minister Michel Sapin said the gap between public revenue and spending would widen to 4.4% of gross domestic product this year from 4.3% last year due to an unexpected slowdown in growth. It will fall back to 4.3% of GDP next year, but only fall under the E.U.’s cap of 3% in 2017–two years later than currently planned.
The figures set the scene for heated discussions in Brussels with the rest of the Eurozone, as the currency bloc’s second-largest economy once again relies on its political clout to defy rules on borrowing that are supposed to be binding on all. (Incoming Eurocrat-in-chief Jean-Claude Juncker is already trying to limit the ability of the Pierre Moscovici, the new economic and financial affairs commissioner, to police those rules, the Financial Times reported Wednesday.)
But specifically, it sets up a fresh clash with Germany, whose insistence on sustainable public finances has stamped Eurozone policy since the Eurozone sovereign debt crisis exploded in Greece in 2010. France has already had to negotiate two extensions to an original agreement to bring the deficit down to 3% of GDP by 2014. Under the new plans, it will have a larger budget shortfall next year than either Greece or Portugal.
“We are committed to being serious about the budget, but we refuse austerity,” Sapin told a news conference in Paris Wednesday.
Sapin has attempted to mollify Berlin and Brussels by committing to €21 billion ($26.5 billion) of government spending cuts next year, and a total of €50 billion over the next three years. Government spending accounts for over 56% of GDP, the highest in the E.U., while its public debt, at over €2 trillion, is now expected to peak at over 96% of GDP. That’s up from only 64% in 2007.
But Sapin said it would be wrong to cut spending by more because it would weaken the economy further. Any further cuts would also be hugely unpopular with the disaffected left wing of President Francois Hollande’s Socialist Party, risking a revolt by backbench lawmakers. The Socialists already lost control of the upper house, or Senate, to the center-right opposition at elections last weekend, and Hollande’s current approval ratings, at 13%, are the lowest for any serving French president since World War II.
The French economy hasn’t grown since the end of last year, and survey data suggest it contracted in the third quarter as the fall-out from the Ukraine crisis hit business and consumer confidence across Europe.
The research firm Markit said elsewhere Wednesday that the Eurozone economy pretty much stagnated in September, revising down its purchasing managers’ index to 50.3 from an initial reading of 50.5.
However, the economy may get some support in the last three months of the year from one corner that has been a major bugbear for Paris in recent years–the foreign exchange markets. French officials have railed all year that the euro was too strong for the health of the Eurozone, but it has slid sharply against the dollar in the last month and hit another new two-year low of $1.26 Wednesday in response to the Markit survey.