CLASH OVER FRENCH BUDGET LOOMING

France has until October 15 to submit its budget and then the Commission has a further two weeks to make up its mind. France estimates that its next year's budget deficit the shortfall between revenue and spending will be at 4.3 percent of annual economic output, well over the 3.0-percent ceiling set by the EU for Member States. France will only meet the EU target in 2017, the second year in a row the French Government has put back the date by two years.

Possible Scenario

1. The European Commission rejects the French national budget and sends it back for revision asking France to make more efforts to meet the EU limits: This would be a major blow for France and it would heighten tensions between France and Germany. Rejecting the budget could also play into the hands of the far-right anti-EU National Front Party.
2. France sends back a new offer arguing that it faces ‘exceptional circumstances’ that still lets it overshoot the EU targets. Exceptional circumstances can include an unusual event outside the control of the [Eurozone government] concerned which has a major impact on the financial position of the general government. Such circumstances could also include “periods of severe economic downturn”, causing a “temporary deviation” in the budget that “does not endanger fiscal sustainability in the medium term”. Accordingly, the Treaty permits a Eurozone member hit by an earthquake, natural disaster, or a severe economic blow to undertake temporary fiscal stimulus. The Treaty notes further that under the revised Stability and Growth Pact, a “severe economic downturn” occurs “if the excess over the reference value [the 0.5% of GDP in structural deficit] results from a negative annual GDP volume growth rate or from an accumulated loss of output during a protracted period of very low annual GDP volume growth potential relative to its potential”. In other words, if a Eurozone has a large output gap, it can implement a fiscal stimulus to reduce it.
3. France’s budget non-compliance is subject to sanctions as much as 0.2% of GDP
4. It also complicates things for Pierre Moscovici, the Commissioner designate for Economic Affairs.