Security Costs

Au Revoir Austerity

France terror DPA
French soldiers guarding the Eiffel Tower in Paris.
  • Why it matters

    Why it matters

    • The European Commission appears to be giving its tacit approval of France’s decision to ignore the budget requirements of the Stability and Growth Pact.
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  • Facts

    Facts

    • Under the Stability and Growth Pact, E.U. countries must remain within a deficit to GDP ratio of 3 percent.
    • France has already been given three deferrals to bring its budget into compliance with the Stability Pact rules.
    • Two other countries, Italy and Austria, have taken advantage of the relaxation of the 3-percent deficit rule.
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    Audio

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The terrorist attacks in Paris are already having wider political and economic repercussions, including within the European Monetary Union.

French President François Hollande no longer wants to adhere to the euro zone’s strict austerity requirements.

France must significantly increase spending on defense and domestic security and can therefore no longer fulfill the requirements of the Stability Pact, the president said in Paris on Monday.

“The security pact takes precedence over the stability pact,” Mr. Hollande said. “France is at war.”

On Tuesday France officially requested aid from its E.U. partners under a security clause in the Lisbon Treaty.

The statement from Mr. Hollande probably means that France will remain a deficit sinner for some time to come.

The European Union has already granted Paris a deferral three times to bring its nominal deficit below the limit of 3 percent of GDP. The latest grace period expires in 2017, but France apparently no longer intends to comply with the deadline. It is still unclear whether the European Commission will tolerate the latest violation of E.U. budget rules.

Speaking in Brussels on Tuesday, Pierre Moscovici, the French European Commissioner for Economic and Financial Affairs, expressed sympathy for his country’s current situation. “The safety of citizens has absolute priority. The Commission understands this completely,” Mr. Moscovici said.

The E.U. executive in Brussels had written an evaluation expressing doubts over Paris’ ability to meet the budget deficit targets before the terrorist attacks last Friday which left 129 people dead and over 350 injured.

The European Commission had predicted that while Paris would meet its budget deficit target next year of 3.4 per cent it was not guaranteed to achieve the E.U. limit of 3 per cent in 2017, as France agreed last year. Instead, it forecast a deficit of 3.3 per cent.

Nevertheless, it approved the French budget proposal, noting that France’s budget planning “largely satisfies the requirements of the Stability and Growth Pact for 2016.”

“ The safety of citizens has absolute priority. The Commission understands this completely.”

Pierre Moscovici, European Commissioner for Economic and Financial Affairs

But the statement was not uncontroversial, and E.U. insiders say that it was not an easy decision for the Commission.

The Commission also presented its so-called “opinions” on the 2016 draft budget plans for other euro-zone member states on Tuesday, but said it did not encounter any serious violations of the European austerity requirements. “By and large, the euro zone is in compliance with the Stability Pact,” said Mr. Moscovici.

This positive statement cannot belie the fact that there are indeed problems in two other euro-zone countries, Austria and Italy. The government in Rome has managed to keep its nominal deficit below the 3-percent threshold, but the debt-ridden country’s cyclically adjusted structural deficit significantly overshoots the target.

The European Commission itself opened the door for such transgressions when it announced a more flexible interpretation of the Stability Pact at the beginning of the year. Since then, member states have been permitted to claim structural reforms and investments to soften the austerity requirements.

Italy is taking advantage of Commission’s relaxation of the rules – and as excessively as possible. In fact, the government in Rome hardly plans to reduce the structural deficit at all next year.

As justification, it not only cites structural reforms and investments, but also expenditures for refugees. The European Commission gave Italy its blessing for this approach, but was not nearly as generous with any other E.U. country. Finland, which also sought to take advantage of one of the new flexibility clauses in the Stability Pact, did not receive the necessary approval from Brussels.

Now that they have been approved by the European Commission, the E.U. countries can have their budget proposals ratified by their own national parliaments unchanged.

The budgets will be presented in Brussels again next spring, when the Commission examines which expenditures are indeed incurred for structural reforms, investments and refugees in 2016. If the E.U. executive continues its current generous policy, Italy, Austria and France should have nothing to fear.

 

Ruth Berschens is Handelsblatt’s correspondent in Brussels. To contact her: berschens@handelsblatt.com.

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