Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in France
Date: 2013-05-29
Institutions: European Commission
Subjects: France, budget deficit, budgetary equilibrium, economic situation, gross domestic product, medium-term forecast, pension scheme, public debt, stability pact

EUROPEAN 
COMMISSION 

Brussels, 29.5.2013  
COM(2013) 384 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
France 

{SWD(2013) 384 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
France 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof, 

Having regard to the recommendation from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU), Member States shall avoid excessive government deficits. 

The Stability and Growth Pact is based on the objective of sound government finances 
as a means of strengthening the conditions for price stability and for strong sustainable 
growth conducive to employment creation. 

On  27  April  2009,  the  Council  decided,  in  accordance  with  Article  104(6)  of  the 
Treaty establishing the European Community (TEC), that an excessive deficit existed 
in France and issued recommendations to correct the excessive deficit by 2012 at the 
latest1,  in  accordance  with  Article  104(7)  TEC  and  Article  3  of  Council  Regulation 
(EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of 
the excessive deficit procedure2.  

On 2 December 2009, the Council decided, in accordance with Article 126(7) TFEU, 
that  although  effective  action  had  been  taken  by  the  French  authorities,  unexpected 
adverse  economic  events  with  major  unfavourable  consequences  for  government 
finances  had  occurred  after  the  adoption  of  the  recommendation.  As  a  consequence, 
the  Council  recommended  that  France  correct  its  excessive  deficit  by  2013  at  the 
latest. In order to bring the general government deficit below 3% of GDP in a credible 
and  sustainable  manner,  the  French  authorities  were  recommended  to  (a)  implement 
the  consolidation  measures  in  2010  as  planned  and  strengthen  the  fiscal  effort  from 
2011 onwards; (b) ensure an average annual fiscal effort of above 1% of GDP over the 
period  2010-13;  and  (c)  to  specify  the  measures  that  were  necessary  to  achieve  the 
correction  of  the  excessive  deficit  by  2013,  cyclical  conditions  permitting,  and 
accelerate the reduction of the deficit if economic or budgetary conditions turned out 
better than expected at the time of  the recommendation. In its recommendations, the 

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All  documents  related 
http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/france_en.htm 
OJ L 209, 2.8.1997, p. 6. 

the  excessive  deficit  procedure  of  France  can  be  found  at: 

to 

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(5) 

(6) 

(7) 

(8) 

(9) 

Council established a deadline of 2 June 2010 for effective action to be taken in line 
with the provisions of Article 3(4) of Regulation (EC) No 1467/97. 

On 15 June 2010, the Commission concluded that based on the Commission services' 
2010  Spring  Forecast,  France  had  taken  effective  action  in  compliance  with  the 
Council recommendation of 2 December 2009 to bring its general government deficit 
below  the  3%  of  GDP  reference  value  and  considered  that  no  additional  step  in  the 
excessive deficit procedure was therefore necessary. 

According to Article 3(5) of Regulation (EC) No 1467/97, the Council may decide, on 
a  recommendation  from  the  Commission,  to  adopt  a  revised  recommendation  under 
Article  126(7)  TFEU,  if  effective  action  has  been  taken  and  unexpected  adverse 
economic  events  with  major  unfavourable  consequences  for  government  finances 
occur  after  the  adoption  of  that  recommendation.  The  occurrence  of  unexpected 
adverse economic events with major unfavourable budgetary effects shall be assessed 
against the economic forecast underlying the Council recommendation. 

In accordance with Article 126(7) TFEU and Article 3 of Council Regulation (EC) No 
1467/97,  the  Council  is  required  to  make  recommendations  to  the  Member  State 
concerned with a view to bringing the situation of an excessive deficit to an end within 
a  given  period.  The  recommendation  has  to  establish  a  maximum  deadline  of  six 
months for effective action to be taken by the Member State concerned to correct the 
excessive deficit. Furthermore, in a recommendation to correct an excessive deficit the 
Council  should  request  the  achievement  of  annual  budgetary  targets  which,  on  the 
basis of the forecast underpinning the recommendation, are consistent with a minimum 
annual  improvement  in  the  structural  balance,  i.e.  the  cyclically-adjusted  balance 
excluding  one-off  and  other  temporary  measures,  of  at  least  0.5%  of  GDP  as  a 
benchmark.  

The Commission services' 2009 Autumn Forecast, which was underlying the Council 
recommendation under Article 126(7) TFEU of 2 December 2009, projected that the 
French  economy  would  expand  by  1.2%  in  2010  and  1.5%  in  2011.  The  years  2012 
and  2013  were  beyond  the  forecast  horizon,  but  under  the  assumption  of  a  gradual 
closure  of  the  large  negative  output  gap  by  2015,  higher  growth  than  in  2011  was 
expected  for  2012  and  2013.  GDP  growth  in  2010  was  substantially  above  that 
expected in the Commission services' 2009 Autumn Forecast, in 2011 it was slightly 
above the projected 1.5%, while in 2012 the French economy stagnated. 

The  Commission  services'  2013  Spring  Forecast  projects  GDP  to  decrease  by  0.1% 
this year, implying a much worse scenario also for 2013 than the one underpinning the 
December  2009  Council  recommendation.  The  weakness  of  households'  real 
disposable income linked in particular to rising unemployment and tax increases will 
be  only  partly  offset  by  inflation  slowing  down,  while  low  business  confidence  is 
expected  to  lead  to  a  continued  fall  in  investment.  A  slight  rebound  of  the  external 
sector is forecast to translate into a modest pick-up in activity during the second half 
of the year. Gradually improving confidence and recovering real disposable income – 
assuming no further consolidation measures – are set to translate into positive growth 
in 2014 (1.1%). Despite the government's efforts to support employment, in particular 
of  young  people  and  senior  workers,  the  unemployment  rate  is  forecast  to  further 
increase, reaching 10.6% and 10.9% in 2013 and 2014 respectively. Inflation is set to 
fall to 1.2% in 2013 on the back of lower energy prices before accelerating again next 
year notably due to planned VAT rises. 

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(10)  The  economic  crisis  has  also  had  a  significant  impact  on  the  general  government 
balance. The deficit rose to an unprecedented 7.5% of GDP in 2009 from an already 
elevated  3.3%  in  2008  due  to  the  play  of  automatic  stabilisers  and  the  discretionary 
fiscal  stimulus  implemented  by  the  authorities  as  part  of  the  European  Economic 
Recovery Plan (EERP). In 2010, the general government deficit decreased to 7.1% of 
GDP,  reflecting  both  cyclical  effects  and  an  improvement  in  the  structural  balance 
(partly offset by deficit-increasing one-offs). The structural balance improved by 0.3% 
of  GDP.  In  2011,  the  deficit  decreased  significantly  to  reach  5.3%  of  GDP.  While 
GDP  growth  remained  unchanged  with  respect  to  2010,  at  1.7%,  the  improvement 
mainly stemmed from strengthened consolidation efforts and the complete phasing-out 
of the EERP. The fiscal effort as measured by the change in the structural balance was 
1.2% of GDP. In 2012, the headline deficit came out at 4.8% of GDP, falling short of 
the 4.5% targeted by the authorities, despite a sizeable set of new measures. Part of the 
difference  stemmed  from  the  cost  of  bailing  out  the  banking  group  Dexia  (0.1%  of 
GDP). The structural balance improved by 1.1% of GDP.  

(11)  According  to  the  Commission  services'  2013  Spring  Forecast,  the  headline  deficit  is 
set to decrease further this year on the back of the measures adopted notably as part of 
the  budget.  Revenue  measures  include  a  further  increase  in  direct  taxes  and  social 
contributions.  Current  expenditure  rules  (central  government  and  healthcare)  are 
renewed  and  this  will  contribute  to  maintaining  spending  restraint.  Lower  than 
previously  projected  inflation  and  the  partial  suspension  of  indexation  for  second-
pillar  pensions  in  agreement  with  social  partners  will  also  help  contain  expenditure. 
However, GDP growth projected again well below potential will negatively affect the 
headline balance. Overall, the deficit is expected to reach 3.9% of GDP. The structural 
balance is projected to improve by another 1.3% of GDP. In 2014, the deficit is set to 
reach 4.2% of GDP under the usual no policy change assumption, which implies that 
only measures known in sufficient detail have been taken into account. In particular, 
part  of  the  measures  aimed  at  funding  the  recent  corporate  tax  credit  for 
competitiveness and employment are yet to be specified and a number of one-off tax 
payments will expire at end-2013. Overall, the stuctural balance is projected to remain 
broadly stable next year.  

(12)  The  structural  deficit,  based  on  the  Commission  services'  2013  Spring  Forecast,  is 
estimated to fall to 2.2% of GDP this year from 6.1% in 2009, i.e. 1.0% of GDP on 
average over the 2010-13 reference period. When correcting for downward revisions 
in  potential  output  growth  (+0.1%  of  GDP)  and  revenue  windfalls  (-0.2%  of  GDP) 
compared with the time the Council recommendation was issued, the average annual 
fiscal  effort  comes  at  0.9%  of  GDP,  thus  falling  slightly  short  of  the  recommended 
effort  of  above  1%  of  GDP.  However,  a  comprehensive  assessment  of  the 
discretionary  measures  implemented  by  the French  authorities  over  2010-13  leads  to 
the conclusion that the cumulative budgetary impact of these amounts to some 5¼% of 
GDP, i.e. 1.3% of GDP per year on average. On top of the improvement achieved in 
the structural balance, the impact of individual discretionary measures over this period 
has  allowed  to  offset  the  trend  in  autonomously  rising  public  expenditure  due  to 
factors  such  as  ageing  and  thus  the  bottom-up  analysis  provides  a  more  positive 
picture  than  does  the  top-down  approach  based  on  the  structural  balance.  Measures 
include  a  substantial 
taxation, 
complemented by hikes in indirect taxes and social security contributions, a freeze in 
base wages of civil servants as well as savings stemming from the General Review of 
Public  Policies  (RGPP),  the  2010  pension  reform  and  the  fact  that  the  healthcare 

in  personal  and  corporate 

increase 

income 

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spending  norm  (ONDAM)  has  been  systematically  (over)achieved.  In  view  of  the 
above, the French authorities can be considered to have taken effective action.  

(13)  The ratio of public debt to GDP, which represented 79.2% in 2009, exceeded 90% last 
year. According to the Commission services' 2013 Spring Forecast, the debt ratio will 
continue to rise over the forecast horizon, to 94.0% and 96.2% of GDP in 2013 and 
2014, respectively, on the back of still relatively high general government deficits and 
subdued nominal GDP growth. Stock-flow adjustments including contributions to the 
European Stability Mechanism and direct loans to euro area programme countries will 
also contribute to increasing public debt. 

(14)  The  substantial  deterioration  in  the  budgetary  position  resulting  from  the  weaker 
overall  position  of  the  economy  relative  to  the  one  underlying  the  2009  Council 
recommendation  suggests  that  revised  recommendations  under  Article  126(7)  TFEU 
for  France  extending  the  deadline  to  correct  the  excessive  deficit  are  justified, 
consistent with the rules of the Stability and Growth Pact. 

(15)  Against  the  background  of  high  uncertainties  regarding  economic  and  budgetary 
developments, the budgetary target recommended for the final year of the correction 
period should be set at a level clearly below the reference value, in order to guarantee 
an effective and lasting achievement of the correction within the requested deadline.  

(16)  An extension by only one year of the deadline for correction of the excessive deficit 
would require a fiscal effort in 2014 well above the average annual fiscal effort over 
2010-13 recommended by the Council on 2 December 2009, which would also hamper 
significantly the projected economic recovery next year. A two-year extension would 
allow  bringing  the  headline  deficit  below  3%  of  GDP  in  2015  while  limiting  the 
impact on growth in 2014 and 2015. Granting France two additional years would be 
consistent with headline deficit targets of 3.9% of GDP for 2013, 3.6% for 2014 and 
2.8%  for  2015.  The  underlying  annual  improvement  in  the  structural  budget  balance 
would  be  1.3%  of  GDP  in  2013  and  0.8%  both  in  2014  and  2015.  Also  taking  into 
account a possible trend deterioration of the structural balance, this would imply that 
discretionary  measures  of  above  1%  of  GDP  per  year  would  be  needed  in  2014  and 
2015. 

(17) 

In  order  to  achieve  the  budgetary  targets,  it  is  crucial  that  the  authorities  fully 
implement  the  already  adopted  measures  for  2013  (currently  estimated  at  1½%  of 
GDP)  and  specify,  adopt  and  implement  rapidly  expenditure  savings  and/or  revenue 
measures of above 1% of GDP per year in 2014 and 2015 (the overall impact of the 
measures adopted/specified in sufficient detail so far for 2014-15 is only marginal). In 
particular, most planned savings backing the various spending norms for 2014-15 still 
need to be specified. Maintaining the freeze in base wages beyond 2013, which applies 
to all sub-sectors of general government, has not been explicitly confirmed. Moreover, 
while the MAP ('modernisation de l'action publique') spending review is on going, it 
remains unclear whether it will translate into sizeable (and easy to quantify) savings. 
Regarding  the  pension  system,  the  actual  measures  that  would  underpin  the  planned 
reform remain to be unveiled. Specifics are also lacking on the projected slowdown in 
local  government  spending.  On  the  revenue  side,  a  number  of  one-off  tax  payments 
will expire at end-2013 and no specific measures to compensate for these have been 
announced  so  far.  Risks  to  next  year's  macroeconomic  scenario  of  the  French 
authorities  are  also  clearly  tilted  to  the  downside.  Indeed,  while  GDP  growth  is 
forecast  to  be  1.2%  and  thus  very  close  the  Commission  services'  2013  Spring 
Forecast  (1.1%),  the  underlying  fiscal  scenarios  are  at  odds:  the  former  factors  in  a 

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structural  effort  of  1%  in  2014  whereas  the  latter  is  built  on  a  slightly  deteriorating 
structural  balance.  The  newly  created  fiscal  council  ('Haut  Conseil  des  finances 
publiques') has also considered the macroeconomic scenario underpinning the current 
2014  deficit  target  as  markedly  optimistic.  Overall,  the  situation  will  have  to  be 
monitored  closely  and  the  authorities  should  stand  ready  to  take  corrective  action  in 
the event of expenditure slippages or revenue shortfalls. 

(18)  The Commission Fiscal Sustainability Report 2012 shows that France does not appear 
to  face  a  risk  of  fiscal  stress  in  the  short  term.  In  the  medium  and  long  term,  risks 
appear medium and low. However, recent developments affecting the pension system 
are  of  more  concern.  In  particular,  the  most  recent  projections  by  the  Pensions 
Advisory  Council  ('Conseil  d'orientation  des  retraites')  point  to  persistent  deficits  of 
the system by 2020. This confirms the urgent need for an additional pension reform in 
order to fully restore the long-term sustainability of public finances. 

(19)  France  fulfils  the  conditions  for  the  extension  of  the  deadline  for  correcting  the 
excessive general government deficit as laid out in Article 3(5) of Regulation (EC) No 
1467/97  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure, 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

(3) 

(4) 

(5) 

France  should  put  an  end  to  the  present  excessive  deficit  situation  by  2015  at  the 
latest. 

France should  reach a headline deficit of 3.9% of GDP in 2013, 3.6% in 2014 and 
2.8% in 2015, which is consistent with delivering an improvement in the structural 
balance  of  1.3%  of  GDP  in  2013,  0.8%  in  2014  and  0.8%  in  2015,  based  on  the 
extended Commission services' 2013 Spring Forecast.  

France  should  fully  implement  the  already  adopted  measures  for  2013  (1½%  of 
GDP)  and  specify,  adopt  and  implement  rapidly  the  necessary  consolidation 
measures  for  2014  and  2015  to  achieve  the  recommended  improvement  in  the 
structural balance, while proceeding as currently planned with a thorough review of 
spending categories across all sub-sectors of general government, including at social 
security and local government level. 

France  should  use  all  windfall  gains  for  deficit  reduction.  Budgetary  consolidation 
measures should secure a lasting improvement in the general government structural 
balance in a growth-friendly manner. 

The Council establishes the deadline of 1 October 2013 for France to take effective 
action and, in accordance with Article 3(4a) of Council Regulation (EC) No 1467/97, 
to report in detail the consolidation strategy that is envisaged to achieve the targets. 

Furthermore,  the  French  authorities  should  strengthen  the  long-term  sustainability  of  the 
pension system by further adjusting all relevant parameters. In particular, the planned reform 
should be adopted by the end of this year, as currently envisaged, and bring the system into 
balance in a sustainable manner no later than 2020 while avoiding any further increase in the 
cost of labour. In addition, to ensure the success of the fiscal consolidation strategy, it will be 
important  to  back  the  fiscal  consolidation  by  comprehensive  structural  reforms,  in  line  with 
the  Council  recommendations  addressed  to  France  in  the  context  of  the  European  Semester 
and in particular those related to the Macroeconomic Imbalance Procedure. 

Beyond  the  report  foreseen  in  recommendation  (5),  the  French  authorities  should  report  on 
progress made in the implementation of these recommendations at least every six months as 

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well as in a separate chapter in the stability programmes, until full correction of the excessive 
deficit has taken place.  

This recommendation is addressed to the Republic of France. 

Done at Brussels,  

For the Council 
The President 

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