France's Budget Conundrum Faces EU Scrutiny
France's Budget Conundrum Faces EU Scrutiny
But Also — Ukraine, Orbán, Capital Markets Union, Migration, Trade
Hello! Today is October 15, 2024, and here is your EU news summary for the week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and LinkedIn.
The Briefing
At the end of September, France received a one-month extension to submit its medium-term structural budget plan to the European Commission.
The late appointment of Michel Barnier as Prime Minister disrupted the budgetary timeline, as the Commission is set to present its recommendations in November during the budgetary dialogue with Member States.
DEFICITS • During the summer, France (with a deficit level reaching 5.5% of GDP), Belgium (4.4%), Italy (7.4%), Hungary (6.7%), Malta (4.9%), Poland (5.1%), and Slovakia (4.9%) were placed under excessive deficit procedure by the European Commission this summer.
This decision was made because these states exceed the 3% of public deficit and 60% of public debt thresholds. It follows the reintroduction of European budget rules that had been suspended for nearly four years due to the COVID-19 pandemic and the energy crisis.
Barnier's government announced significant efforts to reduce the deficit to 5% of GDP by 2025, down from the current 6.2%. Earlier this year, projections indicated a deficit of 4.1% for 2025 in France's stability program for 2024-2027.
REFORM • Revised budgetary rules will apply across Europe starting in 2025. The reform adopted in April 2024 aims to provide more flexibility to Member States while maintaining fiscal discipline.
Although the deficit thresholds (3% of GDP) and public debt limits (60% of GDP) — also known as Maastricht criteria — remain unchanged, the new rules offer greater leeway for European governments to plan their fiscal recovery without hindering growth.
The budgetary surveillance mechanism has been redesigned to better adapt to the economic realities of Member States. Countries must submit a medium-term budget plan, outlining how they intend to reduce their deficit and debt over a four-year period.
This medium-term plan can include structural reforms and investments deemed essential (particularly in the green and digital transitions) in exchange for additional time (up to three extra years, in addition to the four years of the medium-term plan) to converge towards debt and deficit targets.
Taking such investments into account helps ensure there is no disruption of investment in priority areas. Projects co-financed by the EU are excluded from the deficit calculation.
AGENDA • The reform will also align the submission process for deficit reduction plans with the presentation of the autumn package of the European Semester in November. The European Semester is an annual exercise during which governments align their budgetary and economic policies with the objectives and rules agreed upon at the EU level.
This alignment will further streamline both processes, allowing for more regular monitoring of budgetary commitments, especially before the publication of country-specific recommendations in May.
During the summer phase (June-July), the Council adopts country-specific recommendations, which will now directly incorporate measures for correcting deficits outlined in the excessive deficit procedure (if applicable).
SANCTIONS • In case of deviation from the approved budget trajectory, sanctions are foreseen, but they have been eased. Countries concerned face penalties of 0.05% of GDP every six months. The fines are less severe than those under the previous system, in which the anticipated sanctions were never applied. This aims to ensure that countries can correct their finances without being subjected to excessive pressure.
However, states under excessive deficit procedures are required to reduce their structural deficit by at least 0.5% of GDP per year, while taking into account the burdens associated with their debt. This requirement ensures a balance between flexibility and fiscal rigor.
NEXT STEPS • Efforts to synchronize timelines are expected to enhance state commitment to their budgetary efforts. Nevertheless, France is not projected to return below the 3% threshold until 2029—marking eleven years of exceeding this limit.
What’s up EU is delighted to be a partner of the Brussels Sustainability Club, which brings together public affairs professionals to discuss sustainability issues.
In Case You Missed It
UKRAINE • On October 9, the Council of the EU approved a €35 billion loan to Ukraine. The European Parliament still needs to vote on the text (likely on October 22). Kyiv will have the freedom to use these funds — which are intended to support the war effort and stabilize the economy — as it sees fit.
This loan is part of the “Extraordinary Revenue Acceleration” (ERA) plan, an initiative launched by the G7 in June. The ERA aims to raise $50 billion (€45 billion) by using the interest generated from frozen Russian assets in Europe to repay the loan: “We are making Russia pay for the damages it has caused,” stated Ursula von der Leyen in the European Parliament. However, if Russian assets are unfrozen, Western countries will still need to continue repaying the loan.
CLASH • The plenary session of the European Parliament on the objectives of the Hungarian presidency of the EU Council featured a rare confrontation between Ursula von der Leyen and Viktor Orbán. The transcription of the debate is available here, and notable video excerpts can be found here.
In front of Parliament, Ursula von der Leyen accused Orbán of courting Russia and China. Just a few days after the start of the Hungarian presidency of the EU Council, Orbán went on a so-called “peace mission” to Moscow, without any consultation with other Member States. He also relaxed visa regulations for Russia and allowed Chinese police to patrol in Hungary.
In response to von der Leyen’s criticisms, Orbán protested against what he called a “crucifixion attempt” and a “political intifada (...) against Hungarians.” He accused the Commission, which is supposed to uphold treaties, of becoming a “political weapon.” Regarding corruption allegations in Hungary, Orbán prefers to redirect Parliament's attention to its own scandals.
The firm stance taken by the Commission towards Hungary is likely a way for Ursula von der Leyen to reassure her coalition partners before the parliamentary hearings of designated commissioners take place in November.
KAPITAL • Spanish Economy Minister Carlos Cuerpo proposed creating a “competitiveness laboratory” that would allow a group of three or more member states to adopt joint initiatives aimed at advancing towards a more complete capital markets union.
As a first initiative, Spain intends to propose the creation of a pan-European credit rating system for small and medium-sized enterprises (SMEs), aimed at improving their access “to easier and more stable financing.”
The path toward capital markets union is fraught with challenges. The most recent proposal was pushed forward in February 2024 by France and supported by Italy, Spain, the Netherlands, and Poland. It sparked opposition from smaller countries that fear further centralization of capital market supervision by the European Securities and Markets Authority (ESMA).
MIGRATION • The EU’s interior ministers met on October 10 within the context of the Justice and Home Affairs Council. Due to an influx of illegal immigrants, Germany implemented border controls in September. Germany is not alone in doing this — seven other Schengen countries have also established border controls this year: Austria, Denmark, France, Italy, Norway, Slovenia, and Sweden.
European leaders are seeking quick responses to challenges related to migration; however, the European Pact on Migration and Asylum, adopted in May 2024, will not come into effect until 2026. The pact — a package of 10 texts — includes measures for strengthening border controls and sharing asylum responsibilities at the European level.
Among the solutions discussed during this meeting were processing asylum applications outside European territory (as Italy has done with Albania) or expelling rejected applicants or those who entered illegally into third-country reception centers (“return hubs”) while they wait to return to their country of origin.
DUMPING • On October 8, China's Ministry of Commerce announced that tariffs would be imposed on brandy (cognac accounts for 95% of brandy sales) starting October 11. Cognac importers will need to pay a deposit to Chinese customs. China represents a quarter of the global cognac market.
This decision follows the adoption of tariffs on Chinese electric vehicles by the EU Council on October 4. The EU has decided to bring this issue before the WTO, denouncing China’s abusive use of trade defense instruments.
Three days later, on October 11, the EU launched an anti-dumping investigation into wood panels imported from China. European producers are complaining about an influx of low-cost Chinese panels. The investigation will conclude in November 2025, with potential adoption of tariffs.
The EU banned imports of timber from Russia in April 2022. China quickly filled this gap and now accounts for over 30% of the European market and 50% of imports. Turkey, Morocco, South Korea, and the United States have already imposed tariffs on Chinese wood panels.
What We’ve Been Reading
In Politico, Clea Caulcutt and Giorgio Leali report on the deep misunderstandings plaguing French-German relations.
For the Peterson Institute, Olivier Blanchard and Ángel Ubide offer a critical commentary on the Draghi report.
This edition was prepared by Noé Piloquet, Léopold Ringuenet, Antoine Langrée, Luna Ricci, Elisa Zevio, Antoine Ognibene, Maxence de La Rochère and Augustin Bourleaud. See you next week!