Macron Gets Budget Warning From Brussels Over 2020 Spending Hike

(Bloomberg) --

The European Commission told five countries including Italy and France that their draft budgets for 2020 risk breaching the euro area’s fiscal rules.

The European Union’s executive arm sent letters to Rome and Paris as well as to the governments in Spain, Portugal and Belgium demanding further clarification on draft plans they submitted to Brussels earlier in October. The letter to Finance Minister Bruno Le Maire said that France is set to fall short of EU recommendations for improving its structural budget position and for limiting spending increases.

“These elements don’t appear to conform to the budget-policy obligations,” the letter said. “This points to a risk of a significant deviation from the budgetary effort required.”

French President Emmanuel Macron has ramped up spending and lowered taxes in response to the Yellow-Vest protests that rocked the country at the beginning of the year. The commission has to study the budgets of all 19 euro-area members and issue an opinion on whether they’re compliant with EU rules in November.

“In a period of economic slowdown, we have chosen to lower taxes on the French people and advance the pace of budgetary consolidation,” Le Maire said in an emailed statement, adding that France would respect EU commitments on public finance and reducing debt. “It is a political choice we have made to take into account the social situation in France and the international economic context.”

The letters mark a standard step in the long process of reviewing national budgets and don’t mean they will be rejected. Last year, the commission wrote to six countries demanding further clarification and eventually only asked Italy to submit new spending plans, triggering a prolonged standoff between Brussels and the populist coalition in Rome.

EU Rules

This time around the newly formed Italian government is seeking to avoid confrontation.

But Prime Minister Giuseppe Conte’s administration has promised a moderately expansionary budget that would see the country’s structural deficit -- which strips out one-time measures -- widen slightly in 2020 before narrowing in coming years.

That would require flexibility from the commission. In its letter asking Italy for clarification on its draft budget, the EU executive noted the country is “not in line” with policy requirements and that its structural balance will worsen under the plan.

Italy will reply to the commission by Wednesday, according to a finance ministry official, who added that the communication was expected, and is part of normal dialog between Brussels and Rome.

Belgium, Spain and Portugal were all asked to provide clarification because the budget plans they submitted foresee no change in policy -- a standard move for countries in the midst of an election season or with caretaker governments.

Under EU rules, no country can have a deficit larger than 3% of gross domestic product or debt above 60% of output, and governments are required to set annual targets to show they’re moving in the right direction. Even if their plans don’t breach the headline deficit target, they could still run foul of the EU if the shortfall doesn’t narrow at an acceptable pace.

While Italy’s deficit is well within the 3% limit, the commission has demanded smaller gaps for the country to bring down its debt load, which at more than 130% of GDP is second only to Greece within Europe. France, Belgium and Spain are among the many countries that have received warnings or reprimands from the EU in recent years, though never a formal rejection of their draft budget or any financial sanctions.

--With assistance from Gaspard Sebag and Chiara Albanese.

To contact the reporter on this story: Viktoria Dendrinou in Brussels at vdendrinou@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Jerrold Colten

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