French Budget Overshoot: Say Goodbye to the Stability Pact


The stability pact was always an illusion but Macron's minimum wage hike will put a huge spotlight on France and Italy.

Let's recap events in Italy and France that led to this EU predicament.

In an unprecedented move on October 23, the EU Rebuked Italy's Budget. In response, Savini Threatened a Government Collapse and New Elections.

The EU demanded Italy reduce its budget deficit to 2.0% of GDP. Italy insisted on 2.4%. After the threats and counter-threats, the sides agreed to talk.

Note that France gets a deficit of 3.0% but Italy only 2.0%. This is because Italy's debt is higher. In practice, one ever honored any of these "stability pact" rules, including Germany.

Meanwhile, France just threw a wrench into the already clogged stability pact machinery.

In case you missed it, France Suspends Diesel Tax Hike over the riots. Then when that did not quiet the protests, I noted Macron Attempts to Placate Yellow Vest Protesters With Free Money.

The French deficit was 3.0% but thanks to the yellow vest riots, and Macron's response, the French deficit is now estimated to be 3.6%.

Free Money

Q. How did Macron accomplish his free money miracle?

A. By a "monthly government bonus".

Oops, that blows the budget.

With that backdrop let's tune into Eurointelligence for some color commentary.

Stability Pact Overshoot

The spending promises from Macron's speech, together with the postponement of the carbon tax, imply about €11bn less money in the 2019 budget, according to Les Échos. And this is not the only financial fallout from the gilets jaunes movement. The Banque de France already slashed its forecast for Q4 from 0.4% down to 0.2% given the the impact of the ongoing protests on retailers. For next year the finance ministry expects €4bn less income due to lower growth figures, according to the paper's sources. This could push up the deficit to 3.6% of GDP next year.

Right after Emmanuel Macron’s announcement we noted an intense debate among our friends on Twitter on the impact a French fiscal overshoot would have on the eurozone as a whole. One commentator noted that Italy was now off the hook. It would indeed be hard for the Commission to push for an excessive deficit procedure against Italy while turning a blind eye to what is happening in France. Even Jean-Claude Juncker can only push the "because it is France" line so far.  

We also noted another debate on whether rules are only meant for small countries. The argument that you should accompany structural reforms with fiscal laxitude has its fair share of supporters in France and Germany. Germany famously overshot the 3% target in 2003 when it started the Hartz IV reforms. We heard one German economist making the same case for France now. This prompted the reaction that it would lead to disillusionment in smaller member states. A former Portuguese European minister predicted that this would totally destroy confidence in the eurozone.

France has not complied with the stability rules for many years, and it looks like that compliance is not becoming any easier politically.

So what we are seeing is a long-term erosion of the eurozone’s fiscal framework - a framework that lacked intellectual coherence from the beginning.

Macron has been the EU leader who expressed the most ambitious ideas for eurozone reforms - misdirected in our view but ambitious nevertheless. It is ironic that he is now on course to break the rules.

But make no mistake: Macron's fiscal decision is a very serious matter for the credibility of the stability pact, which the European Commission tried so carefully to rebuild after the crisis.

Pick Your Poison

The EU can crack down on France and Italy, or neither.

Imagine after these riots over taxes, the European Commission telling Macron to raise taxes or cut benefits.

Jean-Claude Juncker's comment "because it is France" will not float this time.

Mike "Mish" Shedlock

Comments (13)
No. 1-10

Rules were only made for the PIIGS


The picture of Macron in the dunce cap is hilarious, I hope it can be reused as often as my shopping bags.


And Macron is loved by the fake legacy media.

Imagine how much lower his approval rating (currently at 25%) if the fake legacy media has 24/7 anti-Macron news stories....


"Imagine after these riots over taxes, the European Commission telling Macron to raise taxes or cut benefits."

This possibility seems to have been presaged by the riot police using armoured vehicles with the EU logo on them.


No politician can lead his people to anywhere they don't already want to go. The French definitely don't want to go towards the belt tightening involved in unwinding seven decades of socialist drift.

Mike Mish Shedlock
Mike Mish Shedlock


"The picture of Macron in the dunce cap is hilarious, I hope it can be reused as often as my shopping bags."

I created that in Photoshop. I had to extend the backdrop so the hat would fit in.

Here is the original


If Macron ran on the US democratic ticket in 2020, he would be our next president.

The majority of Americans believe in raising the minimum wage because it exists solely to make rich republicans richer even though it puts a floor on wages. Not a ceiling.

They're also in favor of open borders. Let everyone in unfettered so the democrats can win every election through demographics. And then complain about the quality of schools due to the schools having to teach a bunch of students who don't speak English and only attend classes half the time. But in their mind, the reason schools are bad is because we don't spend enough tax dollars on education.

And if we don't stop all C02 production, we'll all be dead in 10 years. And if you disagree, you're wrong because some author who doesn't understand the science wrote so and he says all scientists agree with him.


It's France. They can do whatever they please and others must stick to the rules because they are not French.

Makes a mockery of the whole set-up, like Merkels unilateral unfettered immigration without consulting others impacted. It's a shitshow. France does as it pleases and screw others sharing the currency.


Thought, smaller economies that are managing to grow (Ireland) will be made to pay for this somehow?

They have the Irish by the balls.


Where is our beloved Timmermans . Somehow I can't hear his critical voice about France. Double standards ? Mr. Timmermans !

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