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Are France and the EU heading towards a budget battle?

Alain Jocard, AFP | France’s François Hollande and Germany’s Angela Merkel at a EU summit in Italy, October 2014.

France’s newly drafted budget for 2015 openly defies European deficit limits. As France’s government tries to save face among voters at home and as an incoming EU Commission seeks to establish legitimacy, the contentious budget could spark a clash.

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France’s government warned last month that it will not lower its budget deficit to 3 percent in 2015, saying that, at best, that target would be met in 2017. The announcement was taken by many austerity-minded leaders in Brussels as brazen reneging on the country’s pledges.

The budget, which places France’s deficit at 4.3 percent of GDP next year, also failed to include plans for substantial cuts to state spending or for raising taxes, with French Prime Minister Manuel Valls claiming this week that it was “technically impossible” to effect changes.

The budget’s text must be submitted to the European Commission for review by October 15, and many observers say the EU body will be forced to reject it and demand modifications.

“France has made it very difficult for Brussels to approve its budget without great risk to its credibility. The text it is submitting is a bit of a provocation,” said Olivier Passet, a senior economist at the French economy research institute Xerfi.

Passet, who was an advisor to the French prime minister’s office between 2006 and 2011, said that Brussels was now dishing out its own stinging language aimed at Paris, as the two sides prepared to defend their positions in the coming weeks.

Repercussions

Valls sternly rebuffed opposition lawmakers on Wednesday when asked about a possible rejection of the budget by the Commission.

“Only one parliament can approve France’s budget… that’s the French Parliament,” Valls told MPs during a questions session. “In any case, the European Commission cannot reject it. It can only make suggestions.”

According to Christophe Blot, a top analyst at France’s OFCE economy research centre, the Commission starts by making suggestions, but it is within its power to eventually demand a fine from a non compliant country equal to 0.2 percent of its GDP.

But the final decision to fine an offending country is not in the hands of the Commission. A majority of the EU’s member countries have to approve the measure in a vote.

That scenario was unlikely, but Blot noted that France was falling out of favor with many European countries, who have accepted painful sacrifices to their budgets in recent years while facing worse economic conditions than France.

“There is growing consensus among EU states that France should not be allowed to flaunt the rules,” said Blot.

The situation has been further complicated by the appointment of Pierre Moscovici, a former French finance minister, to the key post of European Commissioner for Economic Affairs.

When probed on his possible favoritism toward his native country’s government, Moscovici was quick to state he would not hesitate to speed up punitive measures against countries not complying with EU agreements.

No new taxes?

Xerfi’s Passet and the OFCE’s Blot agreed that while negotiations would be strained between two sides whose reputations are at stake, a diplomatic solution was likelier than an all-out confrontation.

Passet said that despite the French government’s promise to voters not to introduce new taxes, they could eventually raise the VAT as a compromise to the Commission and by explaining to constituents that the measure comes from Brussels, not them.

The economist nevertheless questioned whether a rise in the consumer tax could actually help reduce France’s deficit, or if such a measure would even be beneficial for the Commission’s image.

While the incoming EU bosses need to show they are serious about applying existing treaties, and protecting Europe’s debt ceiling, they are also wary of the rise of anti-EU parties across the continent.

They do not want to provide additional fuel to groups like the far-right National Front, which is surging in polls by insisting France has sacrificed its sovereignty on the Commission’s altar in Brussels.

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