November 21, 2019
Brussels warns Paris and Rome about not using low interest rates
The European Commission published its opinion on the draft budgets of all member states, dividing countries into two categories depending on whether they complied or failed to comply with the fiscal targets. Some of those that stayed within the rules could have increased spending, the Commission says. But, as ever, the emphasis was clearly on the eight member states at risk of non-compliance. Four among them - France, Italy Spain and Belgium - were singled out for not having taken enough advantage of the favourable interest-rate conditions to reduce their debt. The latter two still have no new government in place.
France is used to getting a letter from Brussels to warn about a deviation from fiscal targets. Paris usually shoots back with a primacy-of-politics argument. Remember that Emmanuel Macron started off by wanting to deliver on the fiscal targets as a way to build trust with Germany, so that Germany would support him in his eurozone agenda? Those days are long gone. His ambitions for the eurozone have been clipped. Relations with Germany have cooled and the gilets jaunes and the grand débat forced him to prioritise old-fashioned politics. Pierre Moscovici started out as commissioner in 2014 with a warning letter to his home country, and is finishing with yet another letter to Paris. In 2014 it was the high fiscal deficit and lack of structural efforts. This time it is the high level of public debt and France's failure to reduce the deficit during good times. French public debt is currently just below 99% of GDP. The Commission is expecting it to worsen slightly next year. The French government had initially promised to cut debt levels by 5pp during Macron's presidency. Now it looks like it is going to be less than 1pp.
Italy is the other large country that received a warning about its debt-to-GDP ration, of 136%. Brussels is worried that its high debt levels make Italy vulnerable to changes in debt issuance costs. Once the era of low or negative interest rates is over, Italy could face trouble. But the current era could last a while and, for so long as it does, it will be difficult to get a political consensus to pay down debt when the economy is performing poorly. Compared to last year, Brussels is much more relaxed about Italy. After Salvini's threats the current Five Star coalition with the Social Democrats is seen as moderate and reliable. The verdict is thus also a relief. No additional measures are asked of Rome this year. The measures Italy had to take last year will only be assessed in 2021.