France ramps up debt rules fight as file enters last leg of negotiations

French political heavyweights are raising their voices to warn against the risks of an unbalanced and counterproductive debt rules reform, as negotiations look to wrap up before year-end and austere German criteria appear to be here to stay.

Back in April, the European Commission introduced a review of its economic governance framework, which sets rules for the coordination of public debt and deficit levels across the bloc.

Unlike the old rules, which were perceived by a large majority of political leaders and economists to be harmful to investments and growth, the proposed reform of the framework aims to giving member states more leeway to invest in the green and digital transition.

Country-specific investment and reform programmes – aimed at reducing debt ratios over the long term – would be drafted for countries whose public debt levels would go above 60% of GDP, and deficit levels beyond 3% of GDP.

Such programmes would last for a minimum of four years, with the possibility of extension to seven years if the country is undertaking structural reforms or financing critical sectors, including defence and the green transition.

Things started to go sour however as the German government, known for its budgetary orthodoxy and dubbed ‘frugal’ in EU jargon – alongside the likes of Austria, the Netherlands, and the Nordic countries – insisted on introducing uniform numerical criteria, which would apply to all member states indiscriminately.

This, France and other critics said, would just be a repeat of the old rules with marginal tweaks.

Austerity is no political project

As negotiations enter the last leg of the journey, French political heavyweights have been ramping up their game to counter what appears to be a reform gone wrong.

“You can’t be a friend of the Single Market and a frugal [member state],” French Internal Market Commissioner Thierry Breton told a Jacques Delors Institute conference on Monday (11 December).

Financing the green transition, he said, should not just be the responsibility of member states, the public finances of which cannot always cope with the size of the investments needed.

Instead, “we need global mechanisms [to enable] transverse financi­­­­­­­­­­­­­­­­­­­­ng options,” he said – ultimately pointing to the creation of an EU-wide cash pot, possibly the result of a new round of joint EU borrowing.

In the same spirit, just last week, French Economy Minister Bruno Le Maire warned against the risks of a new austerity wave across Europe.

“Austerity does not constitute a European political project,” he said, making the case in favour of more leeway in the debt rules package for green investments: “We cannot say ‘listen, in the three to four years you need to lower public spending levels, there will be no investment in security [or] green industry’. To me, this is a no.”

Even the President of the French Competition Authority, Benoît Cœuré, warned at the Jacques Delors conference that “EU fiscal rules debates were the worst”.

“Relying on member states’ public spending capacities to finance the [green] transition just isn’t sustainable,” he said.

Since the Commission proposal reached the negotiations table, France was all about creating more wiggle room for investments. Paris is also aware that in the current scenario, where old rules are due to be implemented again on 1 January 2024, it would automatically fall within an Excessive Deficit Procedure (EDP).

The European Commission can trigger an EDP to push member states to reduce deficits deemed too large. When this happens, targeted countries must come up with reduction plans, and deadlines – otherwise, they risk being fined. However, in the past, EDPs were never fully implemented.

France is currently at a 4.9 % deficit, and planning to go below the Treaty 3% threshold in 2027.

“But de guerre”

The meeting of EU Economic and Finance ministers (ECOFIN) last week showed the French are trying hard to manoeuvre around Germany’s ‘numerical safeguards’.

The Spanish Presidency of the EU Council’s latest proposal, introduced days before ECOFIN and seen by Euractiv, suggests a new ‘deficit resilience safeguard’, whereby highly-indebted countries would have to reduce their deficits to below 1.5% of GDP instead of just 3% of GDP.

Moreover, countries in an EDP would have to reduce their deficits by 0.5% of GDP every year.

Euractiv understands Le Maire stepped in with a counterproposal – a “war objective” (“but de guerre”), he allegedly called it – where countries above the Treaty deficit threshold of 3% of GDP, and thus subject to an EDP, could reduce their deficit at a slower pace up to 2027.

“One group of countries, led by France, has wanted to exclude both interest payments and green investment expenditures from the calculation of the 0.5% adjustment minimum […]. France’s interest payments are projected to rise by 0.2%-0.3% of GDP per year as higher interest rates push up the average cost of borrowing,” the Bruegel think-tank wrote in a blog post published on Tuesday (12 December).

According to French government projections, publis deficit should go below the 3% bar to 2.7% in 2027.

Such an outcome, were it to be approved – several member states have yet to show support – “would enable member states to manage debt reduction for EU financial stability without risking [their] investment capacities today and tomorrow,” Stéphanie Yon Courtin, a French Renew MEP active on the file told Euractiv.

An extraordinary ECOFIN meeting is due to be organised on 19 December, with hopes an agreement could be struck before year-end.

[Edited by Janos Allenbach-Amman/Nathalie Weatherald]

Read more with Euractiv