CELEX: 52013DC0384
Language: en
Date: 2013-05-29 00:00:00
Title: Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in France

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		52013DC0384
		
			Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in France /* COM/2013/0384 final */
			
				
		
		
			
			   	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)       According to
Article 126 of the Treaty on the Functioning of the European
Union (TFEU), Member States shall avoid
excessive government deficits.
(2)       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.
(3)       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 latest[1],
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 procedure[2]. 
(4)       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
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.
(5)       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.
(6)       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.
(7)       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. 
(8)       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.
(9)       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.
(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 increase in personal and corporate
income 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 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 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)                   
France should put an end to the present excessive deficit situation by
2015 at the latest.
(2)                   
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.

(3)                   
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.
(4)                   
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.
(5)                   
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 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
[1]               All documents related to the
excessive deficit procedure of France can be found at: http://ec.europa.eu/economy_finance/economic_governance/sgp/deficit/countries/france_en.htm
[2]               OJ L 209, 2.8.1997, p. 6.