Paris Doesn't Like Lectures from Brussels

French fiscal policy and its monitoring by the European Commission are currently reminiscent of a joke by Mark Twain: “Never put off until tomorrow what you can do the day after tomorrow”.

For years France has been violating the budget deficit rules of the European Stability and Growth Pact (SGP). While it is unfortunate that the French government sees no urgency in addressing this problem, it comes as little surprise. The alarming fact is that the European Commission, which is charged with monitoring the debt policy of member states, is just as lackadaisical as the French when it comes to taking action. The situation in France is important because it vividly shows that the coordination of fiscal policy in Europe is in dire need of reform.

In 2009 France's budget deficit rose considerably due to the global economic crisis. Many other countries also saw rising deficits. Yet in 2008 France was already running a 3.2 per cent deficit in violation of the SGP. In the “crisis year” of 2009, the French deficit rose to 7.2 per cent. In that same year, the European Commission recommended that France bring its deficit under the three-per cent-level by 2012. An extension until 2013 was granted shortly thereafter.

As it became clear in 2013 that the deficit would be 4.1 per cent, the European Commission extended the deadline once again, calling for a reduction to 3.6 per cent in 2014 and 2.8 per cent in 2015. Now the French government has announced it will fail to meet the 2014 deficit goal – and that its deficit will rise even further, to 4.4 per cent. The French even project an increase to 4.5 per cent in 2015. A return to below the three-per cent-level has been deferred to 2017. The question now posed to the European Commission is whether sanctions should be taken against France. The Commission has decided for the meantime to do nothing, but will deliberate again on this issue in March of 2015. Commission President Jean-Claude Juncker has stated in all seriousness that France doesn't like to be lectured by Brussels. Should the Commission only demand adherence to rules when member states enjoy being reproached for violations?

What can this teach us? First of all, the key error made by the French is not an unwillingness to reduce deficits in the face of difficult circumstances, but rather prodigal spending when times were good. If the French had been close to a balanced budget prior to the crisis, then they would have had room for countercyclical policy within the limits of the three-per cent-deficit level. The monitoring regime for fiscal policy in Europe should demand solidity in good times and resort to sanctions if needed, instead of trying to lock the stable door after the horse has already bolted.

Second, the monitoring regime is not sufficiently robust. Additional rules are needed to ensure the buyers of government bonds are liable when a member state is overindebted. The current conflict concerning the French budget could be defused if the share of the deficit that exceeds three per cent were financed with the emission of subordinated bonds that would no longer be serviced if France requires the help of the ESM or if the ECB buys French bonds. If the rest of Europe wasn't on the hook for France's debts, then Europe wouldn't need to instruct France on whether or not it is allowed to live beyond its means. But until that day comes, Paris will have to put up with lectures from Brussels – regardless of whether it likes them or not.