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Monday, October 06, 2014

Showdown between France and Commission set to test EU’s budget rules

It has been widely reported over the weekend that the European Commission (EC) is seriously considering rejecting France’s new budget proposal which will see it run a deficit of 4.3% next year rather than the EC target of 3%.

As the graph above shows, France has strayed significantly from the path originally agreed with the EC, even after it requested and was granted additional time to meet its deficit targets just last year.

Importantly, this is the first time a country has flagrantly flouted the budget rules. Other countries have missed their targets or asked for extensions, but with the presumption of good faith and serious efforts being made to meet said targets. However, with its latest budget France has rejected the previously agreed cuts (worth 0.8% of GDP) and offered just 0.2% of GDP in savings. In other words it has flat out chosen to ignore the rules.

This may seem like semantics but it puts the EC and the EU more broadly in a tough position. With much of peripheral Europe failing to meet the fiscal rules agreed under the Stability and Growth Pact (SGP), the Fiscal compact and the European Semester, many have already been questioning the effectiveness of these tools. Ultimately, the EC risks replaying one of the key features of the previous crisis – letting a big country break the SGP and then being unable to effectively enforce it for other countries, helping to facilitate the large build-up of sovereign debt.

This is therefore a key test of the viability of the new rules and whether this time will really be any different. Combined with the renewed bank stress tests and bail-in rules, the coming months are an important testing ground for the new financial architecture which the Eurozone has put in place.

Sadly, as Reuters highlights, another fudge looks to be on the cards. While the EC will probably reprimand France to the fullest extent before getting to outright fines, it will also work up a new looser programme which gives it more time. This helps all sides save face and avoids the risk of further weakening French President Francois Hollande to the benefit of the Front Nationale (something which the EU wants to avoid).

As for what happens now, the EC will provide a verdict on the budget by the end of the month in what will be one of the last acts of the Barroso Commission. This is of course all complicated by the hand-over of the EC and the wrangling over who will actually be in charge of enforcing the budget agreements. When all is said and done another muddle through is likely, but with the Eurozone facing economic stagnation investors may be less than convinced by such moves.


Rik said...

Probably will be higher than that. France is overoptimistic about themselves and growth etc estimates are that as well.
Will be 5ish is my estimate.

So much for the rule of law as well, they donot even bother changing it.

jon livesey said...

Sorry, but I think you just have this one totally backwards. Just today, Manuel Valls, the French PM, made the point in London, that France has previously twice cut Government spending by E30bn each time, only to see slowing growth lead to cuts in tax revenue of the same scale, and so leaving the deficit unchanged.

There is no real merit in keeping to rules that are counter-productive. The euro area have the wrong approach. Rules that dictate cuts in spending are not the right rules.

The right approach would be for France to keep spending flat or slightly growing for a period during which they implement Thatcherite reforms that take Government out of running businesses, rationalise welfare, and cut spurious regulation.

Those reforms took the UK about a decade to Complete, and there is no reason to suppose that France could do them quicker. But what's the alternative? A triple dip recession, rising unemployment, ultimately a depression? And Le Pen waiting eagerly in the wings?

We have to stop asking of people are keeping to the rules and start asking if the rules are the right rules.

Anonymous said...

I agree with Rik and John above.

But, it is not only austerity that is the problem :

1. Stop the EU bureaucrats trying to introduce more and more pointless regulation. For example, the EU's draconian approach to London's Financial Services is pushing jobs outside of the continent to the Far East/India. Roll back the regulation and the powers of the EU.

2. Stop the EU-expansionist empire building exercise that has seen conflict with Russia over the Ukraine. Have you see the impact of this announced this week on German factory orders? We need stability in order to invest. FTSE 100 companies now have a bigger cash pile than they did in 2008 which shows a lack of willingness to invest.

3. The Euro doesn't work for the countries currently in it. Some (i.e. Germany or the South Med/France/Italy) have to leave to make themselves competitive. The Euro needs a level of fiscal control over Euro nations to ensure success. This has still not been achieved. In fact nothing has been achieved since 2008.

4. Re-structure labour markets and do away with restrictive laws and practices. Why hasn't the EU's "Single Market" not yet opened out legal, accounting and other services? These are areas where the UK is strong.

5. Realise that the EU's social model is completely at odds with Free Trade and globalisation.
i. Ensure that large multi-national companies pay their fair share of corporation and other taxes.
ii. Free Trade is two-way and not just one way. China and other emerging economies such as India are taking and not giving back. Witness local company ownership rules, software and media piracy and closed market segments evidenced by the trade balance with these nations.

6. Re-visit Green Taxes on fuel. EU nations are subject to them, which pushes up costs yet imports to the EU are effectively free of these taxes. Ensure a level playing field for all. Apply green taxes to imports or take them away for EU producers.

I am sure that there are other areas too that need a complete re-think. The trouble is that I have no faith in the EU to make the right decision and/or make any decision in the right timeframe (i.e. NOW).

We need to escape this collective madness and leave the EU. We need to be free to trade, free to think and free to act without the EU's endless suffocation and control.


Rollo said...

well what is needed is separate rules for each of the major economies, which of course means the end of the Euro.

Jesper said...

The current set-up is a bonanza for insiders and puts irresistible pressure on the central-planners in the commission and in the ECB.

The EU is defined in the treaties as being a market-economy. That could (and in my opinion should) be interpreted to mean that neither the commission nor the ECB should interfere in the market pricing of government bonds.

If France or any other country can borrow, then let them borrow but also allow for bond-holders to make losses.
Some in the market will make the wrong bet, some will make the right bet. Don't reward the gamblers by refunding all the losing bets.

Anonymous said...


I agree but Euro sovereigns and their banks are intertwined. EU banks hold large amounts of their own government's bonds. I gather that the price of these bonds on the banks' books does not represent reality either.

Letting the banks go will bring down the sovereigns too.

Let them all fail?


johnlandseer said...

Rules are for fools but for the guidance of wise men....

Jesper said...

@Anoymous (SC),

The intertwining of the banks and the sovereigns is the same problem as it always was.

Sovereigns have defaulted in the past, banks went under and the world didn't go under. In fact, not even the sovereign went under.

If a sovereign can't pay back what it borrowed then it won't.

Unions can be broken but banks cannot?
If so, then there is no more democracy only oligarchy. Coincidentally I suppose a career working for oligarchic banks after 'serving' the public is more lucrative than working for a union.....

Anonymous said...


The problem of banks and sovereigns isn't the same as it always was. It has gotten much worse since the credit crisis began in 2008.

I have no problem with inefficient and negligent banks being broken and their management going to jail - minus their assets and pensions. This is something that the EU should have done in the EuroZone post-2008. Allowing banks to buy broken Euro sovereign debt and then forcing the self-same banks to value these holdings at par is nothing short of a fraud.

The EU broke the Cypriot banks by changing market convention. Normally, equity holders go first, followed by bond holders and then depositors. In Cyprus they broke depositors first and partially broke equity holders and bind holders.

Confidence has been broken in the EU and EuroZone and I, for one, do not intend to back and put my money in. All we need is another Google-type ruling and it will be over for decades if it isn't already. Or perhaps we could have another hilarious EU Banking Stress Test?!

The emperor has no clothes. Breaking major EU banks now, will break EU sovereigns and lead Europe and the world into the biggest depression that the world has ever seen.

BTW - what have the unions got to do with this?


Jesper said...

@Anonymous (SC),

Thatcher broke the unions, wasn't pleasant for anyone involved still it got done. Not many around with that kind of courage now and if the banks needs to be humbled then the outsized fear of breaking the banks needs to be overcome.

The populist Swedish government who did everything they could to increase the size of the credit bubble in Sweden has now resigned and leading people in that government are now applying for well-paid jobs in the banking industry. If they had stood up for workers rights then they would have been able to apply for jobs working for unions but those jobs don't pay much...
They promised that lowering taxes would fix everything in Sweden, from ranging from weak defensive military capabilities to emigration of skilled but underpaid people - hence the populist tag.
When the credit bubble in Sweden breaks it will be very bad.

The problem is the same as it always was during a credit crisis. Some wants to raise the white flag and surrender to banks because they're convinced of TINA.

Not breaking the banks will increase inequality and therefore prolong the depression.

What happened in Cyprus was that following best practice: Equity wiped out, then creditors got what they were entitled to according to ranking and depositors were made whole up to the guaranteed amount. The world didn't end, Cyprus is still around and some careless investors lost money.

Anonymous said...

@ Jesper

You sound like one of the EU bureaucrats that have gotten the continent into such a mess (sorry).

Malus is malus whether it is dishonest bankers or dishonest politicians that deny us democracy and break states via a dishonest political project. Greed and power corrupt bankers, politicians and is a human frailty. What's the difference between bankers and EU bureaucrats?

Thatcher only really broke the miners, who having brought down one democratically-elected government tried to do it again. Any nation cannot go on subsidising an industry if it refuses to change for the better in the long-term. Change is constant and ongoing and, if not, is cataclysmic when it finally comes.

The UK, especially, needs a better social contract between management and unions that look after both parties in the long term.

"and depositors were made up to the guaranteed amount" - No, they were broken first. Cyprus is a fraction of the size of the EU. Try this on an EU scale and see what happens. Disaster for decades.

Some of your misguided banking comments (read grudge) make me extremely worried about the direction of OE and what it actually stands for.


Anonymous said...

I know what happened in Cyprus and am watching the ongoing disaster in the EuroZone created by ideologists with no understanding of what they have created and how to fix it. They have also stolen democracy with it. It is going to end badly - just how bad is up for debate.

You have your EU-tainted glasses on that mixes up fact and fiction. Do you also believe in money trees and tooth fairies?

As for "What happened in Cyprus was that following best practice" - EU Best Practice! Breaking depositors just because they are rich Russians doesn't matter then? Changing market convention, laws and rules on-the-fly to suit the circumstances does not assist in TRUST & CONFIDENCE when it comes to investment.

I read and make up my mind. It looks like the EU has made up yours for you.


Jesper said...


a quote from your post:
"The EU broke the Cypriot banks by changing market convention. Normally, equity holders go first, followed by bond holders and then depositors. In Cyprus they broke depositors first and partially broke equity holders and bind holders."
You've not referenced a source to support your claim and your claim is factually incorrect. You're the one spouting fiction supporting your view.

& another quote from the article:
"The government sought to shield rich Russian depositors from full losses at Bank of Cyprus and Laiki by imposing haircuts on state-guaranteed deposits below €100,000, at least until the Cypriot parliament rebelled. “Some politicians were trying to protect Russian clients,” said a senior official."

Shielding depositors above the guaranteed amount would come at a cost. The banks were bust, the banks lost the money of the wealthy depositors. The banks were to blame for the losses that 4% of depositors had.

Check the facts.