Forecasts show efforts to rein in spending are having less effect than previously thought
41 minutes ago by: Jim Brunsden in Brussels and Mehreen Khan in London
Brussels laid out the scale of the task facing new French president Emmanuel Macron to balance France’s troublesome public finances as it warned that Paris’s efforts to rein in spending are having less effect than previously thought.n its latest economic forecasts, published on Thursday, the European Commission said that the French budget deficit was on course to come in at 3 per cent of GDP in 2017, at the outer limit of what was allowed under the EU’s budget rules, before rising to 3.2 per cent in 2018. The commission previously predicted a deficit of 2.9 per cent this year, and 3.1 per cent next year.
Brussels said that the worsening numbers reflected lower than expected tax and social security receipts by the state, and higher spending on education, security and civil servant salaries. The commission also warned that rising inflation would make it harder for the French government to comply with domestic rules that cap state spending, and that this “represents a risk to the forecast.”
Mr Macron’s stunning win in the presidential elections has been swiftly followed by calls from Brussels for budgetary rigour. Jean-Claude Juncker, the commission’s president, has already weighed in with calls for France to do more to comply with euro area spending rules, telling an audience in Germany on Monday that “the French spend too much money and spend it on the wrong things”.
In contrast to his main presidential rivals, Mr Macron’s manifesto promised to bring France’s deficit under the 3 per cent ceiling as early as this year. Macron — What next?
Pierre Moscovici, EU economics commissioner and a former French finance minister, has also urged that more be done to bring the budget deficit within the EU ceiling of 3 per cent of GDP.
The remarks are a sign of impatience in Brussels that Paris take firm steps to comply with the target, which France has consistently missed since the 2008 financial crisis, and also of the hope that Mr Macron’s reform programme can spur growth and economic recovery. As well as gloomier predictions for 2017 and 2018, the commission on Thursday increased its estimate of the size of France’s 2016 budget deficit from 3.3 to 3.4 per cent. Its growth forecasts remained unchanged.
Brussels made clear its numbers do not take into account any of the new president’s plans, which include slashing spending on public administration and redirecting the money into a jobs-programme, as they are based on a “no-policy change assumption”. Country’s economy is no basket case, but the president-elect still has problems to solve
The worsening French deficit numbers contrast with a generally improving economic outlook for the eurozone economy that is enjoying is best period of growth since the continent’s debt crisis hit seven years, according to a series of private sector surveys.
Overall GDP growth is expected to come in a 1.7 per cent this year, a slight upgrade from an earlier forecast of 1.6 per cent and accelerate to 1.8 per cent in 2018.
With a brightening world economy supporting the continent, the commission said risks to the eurozone’s outlook were more balanced but remained skewed to the downside.
A steady fall in unemployment has been hailed as one of the most impressive parts of the current upturn, with the commission predicting the jobless rate will slip below 9 per cent for the first time in almost a decade in 2018. It currently stands at an eight-year low of 9.5 per cent.
Amid high-profile criticism from the US administration over Germany’s over-sized trade surpluses, the commission forecasts a significant reduction in the country’s current account surplus from record levels in 2016.
The forecasts suggest Germany’s current account will decline from 8.6 per cent in 2016 to 7.6 per cent in 2018 driven by higher domestic spending in the eurozone’s largest economy. Berlin’s prized budget surplus — the difference between what the government spends and earns in taxes — will also shrink from a 0.8 per cent surplus to a broadly neutral 0.3 per cent in 2018.
Italy however is set to remain a concern for EU officials, staying on the sidelines of the broader recovery despite the an overall brightening in the eurozone’s fortunes this year.
The Italian economy, the eurozone’s third largest, will be the slowest growing in the 19-country bloc this year, at 0.9 per cent — unchanged from 2016 — while its debt ratio will grow to peak at 133.1 per cent. Unemployment will remain stubbornly above 11 per cent over the forecast horizon, stretching out to 2018. Italy is set to hold an election in the next 12 months to replace an interim government put in place following the resignation of prime minister Matteo Renzi in December. The country’s long-awaited state restructuring of bank Monte dei Paschi is awaiting the green light from the Brussels. “Political uncertainty and the slow adjustment in the banking sector represent downside risks to Italy’s growth prospects”, the commission said.
Brussels also warned that key economic indicators for Greece have worsened since its last forecasts in February — a consequence of delays in getting an agreement between euro area governments and the International Monetary Fund on the next stages of the country’s bailout programme.
Greece’s economy is expected to grow 2.1 per cent in 2017 and 2.5 per cent in 2018 — a sharp revision downwards compared with the 2.7 per cent for 2017 and 3.1 per cent for 2018 estimated in the commission’s February forecasts.
Having had a more pessimistic outlook on the UK’s growth rate compared with the Bank of England, the commission bumped up its 2017 growth forecast from 1.5 per cent to 1.8 per cent, and 1.3 per cent from 1.2 per cent in 2018.
The economy will be helped along by an export boost from a weaker pound, said Brussels, but made no mention of the UK’s Brexit negotiations.
Malta will come in as fastest growing eurozone economy this year, expanding 4.6 per cent, followed by Luxembourg (4.3 per cent) and Ireland (4 per cent).