EU Authorities Won’t Seek More Budget Cuts From France, Italy
Brussels Is Expected to Shun Hard Line on Deficit Targets Amid Europe’s Economic Woes
The anticipated decisions are a sign the bloc isn’t adopting a hard line against Paris and Rome amid the region’s continuing economic woes. With unemployment in double digits and the eurozone at risk of slipping into another recession, authorities here are wary of requiring the eurozone’s second and third largest nations to hit previously agreed budget targets for 2015 through significant tax increases and spending cuts.
The reviews, which will likely be announced on Thursday, are part of the eurozone’s new system of budget oversight. Officials in Brussels at the European Commission, the EU’s executive arm, get to review eurozone budgets before they are adopted by national parliaments. If they identify major problems, authorities can issue formal recommendations that can lead to fines against governments that refuse to follow them.
Because of the eurozone’s flagging growth prospects, France and Italy have both proposed to miss budget targets they had agreed to earlier this year. Weaker-than-expected growth lowers tax revenue and boosts spending on social benefits such as unemployment insurance, making government budget-deficit targets harder to achieve.
Late last month, EU officials decided against raising serious objections to the French and Italian budget plans. On Thursday, the EU won’t make further recommendations for Paris and Rome, officials familiar with the decisions said. That partly reflects the fact that their budget plans for next year aren’t completed yet, nor are final budget results available for this year.
But it also reflects an acknowledgment that economic conditions have deteriorated significantly since the targets were accepted in July.
The commission could still take action against Paris and Rome if it feels that their budgets don’t do the minimum necessary required by the EU’s budget rules. France must cut its structural deficit—the actual deficit adjusted for the ups and downs of the economy—by at least 0.5% of gross domestic product each year for the next several years.
France’s initial budget in October proposed a cut of only 0.2% next year. But Paris now says its deficit will be in line with EU targets after tweaking forecasts for debt charges, changing how it accounts for some tax breaks, and introducing extra measures to raise tax revenues from banks. The EU is likely to accept the new target but is still skeptical of whether France’s plans will meet that target, one EU official said.
Italy still faces a requirement to cut its debt burden in line with a new EU rule that requires governments with debts above the EU’s acceptable threshold—60% of annual GDP—to cut their debt each year by 5% of the difference between their current debt levels and 60% threshold. That requirement will start to come into force in 2016, requiring tax increases and spending cuts well beyond what the Italian government is currently proposing.
The EU official acknowledged that it wasn’t feasible to require Italy to abide the rule in the current economic climate.