The Next French Government Faces Financial Challenges
The next government of France will need to find over 15 billion euros in additional revenue or cost savings in order to meet the requirements of the European Union, according to sources familiar with the accounts. This amount was included in a proposal sent by the European Commission to Paris in June, as noted by well-informed sources. It is equivalent to about 0.55% of the country’s annual GDP over a period of seven years.
Brussels’ opening move will serve as a basis for difficult negotiations with the future French cabinet, which is set to take office soon. The government will need to carefully consider its financial strategy in order to meet the demands of the EU while also ensuring the stability of the country’s economy.
Challenges Ahead for EU Member Country
The country in question is one of the few members of the EU that was warned in June for violating the community’s fiscal rules and is currently under monitoring, which could lead to potential sanctions. Negotiating any expenditure cuts will be a difficult task after the extraordinary presidential elections that saw the alliance of left-wing parties win. However, they do not have an absolute majority in parliament, with different political groups taking different stances on budget policy.
Is the outgoing government up to the task?
The Challenge of Balancing Budgets in France
The government promises extraordinary measures to cut spending this year, but the parties vying for the next cabinet have pledged significant increases. Even the hastily crafted pre-election manifesto of Macron’s group is projected to add around 21 billion euros annually to the deficit, according to the Monten Institute. Given the debt burden and Brussels’ oversight, the president of the Bank of France, Vilaroue de Gallo, warned on July 11 that the country should not increase its budget shortfall. “We cannot afford to sink deeper into deficits,” he cautioned.
The Impact of Financial Strain on State Sovereignty
According to a recent radio interview on Franceinfo, the rising costs of funding are putting pressure on state sovereignty. The amount of 15 billion euros, part of negotiations for France to receive more time to bring its deficit below the 3% GDP threshold, is causing concerns among experts. Extending the legal period from four to seven years complicates discussions on reforms and investments that could benefit the country in the long run.
Reforming the Unemployment Insurance System in France
France is facing challenges in reforming its unemployment insurance system, which is in dire need of changes. However, the Prime Minister’s decision to cancel the implementation of these reforms on the night of the first round of voting has raised concerns.
If France fails to secure an extension of the time horizon, it will be forced to make more drastic cuts in spending. According to the Belgian institute “Bruegel,” the adjustments would amount to 0.94% of GDP in a four-year scenario instead of 0.54% in a seven-year scenario.
The recommendations made by countries in June aim to guide them in preparing their medium-term fiscal plans. It is crucial for France to address these issues promptly to ensure the stability of its economy.
New fiscal regulations in the EU
Member states of the European Union are required to submit their new fiscal programs to Brussels by September 20th, in accordance with the updated fiscal regulations of the EU. These programs will then be strictly reviewed by official representatives of the European Commission and the financial ministers of the bloc, and will serve as the basis for the annual budgets that member states must submit by mid-October.
Community members can negotiate with Brussels to extend the September deadline by a reasonable period of time, as stated by an EC spokesperson. However, if such an agreement is not reached, the f
The European Commission urges the community’s finance ministers to follow the June recommendations
The European Commission has recommended that the finance ministers of the community should advocate for the full implementation of the June recommendations. This is crucial for investors in bonds, especially in the case of France, as its public debt exceeds 110% of GDP and continues to rise. Currently, the yield spread between German government bonds and similar French securities is around 65 basis points, significantly higher than the average of nearly 40 points over the past five years.
The importance of fiscal policy in France
Despite being “rewarded” by financial markets with a “premium,” France’s fiscal path is of utmost importance when its public debt is at a critical level. It is essential for investors to closely monitor the fiscal policies and economic strategies of France to make informed decisions about their investments.
The pressure on investors may increase ahead of upcoming rating agency reviews
As the financial markets brace for potential downgrades in credit ratings due to the economic impact of the pandemic, investors are feeling the pressure. The uncertainty surrounding the future of various industries is causing concerns among investors, who are closely monitoring the situation.
With the possibility of a “calm before the storm,” the pressure on investors may intensify as the scheduled reviews by rating agencies approach in the coming months. This could lead to heightened volatility in the markets as investors react to any changes in credit ratings and adjust their portfolios accordingly.
