France and Italy are criticized for the EU deficit

(June 19): France and Italy have been reprimanded by the European Union for running large deficits, the first stage in a showdown that will test the bloc’s resolve and could theoretically lead to billions of euros in fines.

The European Commission’s announcement on Wednesday has all the more implications as French parliamentary elections approach and have given investors the prospect that a winner from the far right or left will only further swell the country’s public finances.

A total of seven countries are again facing censure by officials for running their budget deficits above the bloc’s 3% limit, subjecting them to the bloc’s so-called Excessive Deficit Procedure, which requires corrective action and could lead to fines for non-compliance.

“Fiscal sustainability challenges are low in the short term in all EU Member States, while in the medium and long term they are high in several countries, due to expected high and/or rising debt ratios in some Member States” , the committee said.

Of the countries mentioned, France and Italy attract the most attention due to their enormous size as the eurozone’s second and third largest economies respectively, each with debts significantly exceeding 100% of gross domestic product. Romania has already faced a reprimand, and other countries now joining it are Belgium, Hungary, Malta, Poland and Slovakia.

In France, the move raises the stakes for whoever wins the snap elections called by President Emmanuel Macron, which will take place within the next three weeks. His party is currently in third place, while the far-right National Rally and the left-wing alliance vying for power have signaled a more aggressive stance towards Brussels.

A large-scale dispute would have disturbing parallels with the eurozone debt crisis, when the currency’s integrity was threatened as investors panicked over the standoff between the EU institutions and heavily indebted European governments such as Greece.

Macron’s election announcement already evoked echoes of that unrest, widening the spread between French and German government bonds and causing ripple effects in Italy and other countries in the region.

The yield premium that investors demand to hold 10-year French government bonds over German banknotes remained two basis points higher at 79 basis points after the report’s publication, the highest level since 2017.

The spread has risen by 32 basis points since Macron called for early elections, sending markets into a tailspin. Some investors say the gap could eventually reach 100 basis points, a level last seen when the eurozone sovereign debt crisis was in full swing.

The European Central Bank – an institution that could be on the front line of any crisis response – added its own voice of concern on Wednesday with a report calling on eurozone member states to immediately start reducing debt, given the enormous long-term debt. budgetary risks due to an aging population, defense spending and climate change.

The commission’s announcement marks the culmination of years of recalibration of the bloc’s debt and deficit regime. The updated rules could allow for greater enforcement through fines, as opposed to a system of sanctions that has never been activated before.

The next phase will be the presentation of medium-term plans by countries by September 20 committing to a ceiling on net spending growth for the next four years, followed by reviews of these by the committee in November, setting a budget path to follow to balance their books.

The regime, known as the Stability and Growth Pact, was suspended for the duration of the pandemic to allow for large-scale relief spending, which was then followed by support measures during the recent cost of living crisis.

The fiscal damage is still palpable. In France, Brussels expects debt to continue rising and reach almost 114% of output next year. Last month, S&P Global Ratings downgraded the country, highlighting missed targets in the government’s deficit reduction plans.

Italy’s debt-to-GDP ratio, which fell to 137% last year, is also rising again, putting the country on track to surpass Greece within three years with the largest pile of loans in the region, Scope Ratings shows.

Unlike Macron, whose party was defeated in the European Parliament elections earlier this month, Italian Prime Minister Giorgia Meloni is currently highly regarded, commanding a strong majority and politically buoyed by her own victory in that region-wide vote.

But the government in Rome is saddled with a particularly heavy legacy from the pandemic, which hit the country before many others and subsequently led to a home renovation measure called the super bonus that will continue to haunt public finances for years to come.

The EU’s warning will inevitably lead to a dilemma for Meloni as she weighs whether to bow to Brussels and abandon campaign promises, including a costly tax cut on wages, which will cost her about €10 billion ($10.7 billion). ) would cost. That could cause rifts in her coalition, especially from rival and League leader Matteo Salvini.

The commission’s announcement granted a reprieve to Spain, Estonia and the Czech Republic, whose deficits exceeded the bloc’s 3% mark last year.

In the case of Spain, the Eurozone’s fourth-largest economy, debt exceeds 100% of output but is now on a downward trajectory, unlike the situation in France and Italy.

Romania was already subject to an excessive deficit procedure. Officials criticized the country’s lack of action to improve its budget and economic situation. One of them, speaking on condition of anonymity, called the inability to act “extremely worrying.”

Uploaded by Siow Chen Ming

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