(Bloomberg) — Just months before the European Union reasserts its fiscal regime over the region, France and Italy are signaling defiant indifference.
(Bloomberg) — Just months before the European Union reasserts its fiscal regime over the region, France and Italy are signaling defiant indifference.
Budgets for 2024 unveiled on Wednesday in the euro-zone’s second- and third-biggest economies show deficits noticeably exceeding the bloc’s 3%-of-output limit for years to come, even as a pandemic-era suspension of such rules ends on Jan. 1.
Underscoring Europe’s fault line, on the eve of those announcements, Germany slashed fourth-quarter borrowing plans by €31 billion ($33 billion).
The deficit in Europe’s largest economy, long known for its budgetary reticence, is projected at only 2.5% next year. Both Spain and the Netherlands — respectively the fourth and fifth-biggest members of the currency area — have also signaled plans to fall into line with the EU limit.
The widening spread of Italian bond yields over Germany’s underscores that country’s spotlight from investors. But the gist of this week’s fiscal plans also point to how French President Emmanuel Macron and Italian premier Giorgia Meloni are increasingly exposed in stark relief to their regional peers.
“Italy isn’t isolated anymore,” said Domenico Lombardi, an economist and head of the Policy Observatory for Rome’s LUISS University. “It’s likely that we will see the two countries increasingly moving in step on public-finance issues, not to mention other matters like migrants.”
Only outline details of Italy’s budget emerged on Wednesday evening in Rome, but the numbers so far point to almost-stalling debt reduction in 2024 — and wider-than-expected deficits.
The shortfall for next year is now seen at 4.3% of gross domestic product, up from 3.7% targeted in April, as Meloni’s coalition grapples with a weakening economy while trying to meet generous electoral promises. Only in 2026 is the deficit seen back at 3%.
Meanwhile in France, next year’s gap is envisaged at 4.4% by Finance Minister Bruno Le Maire. He doesn’t see a return to 3% until 2027 as he too contends with constant demands to placate restless voters.
“It’s not always easy being finance minister in a country that loves public spending,” he told the the U2P conference of small business leaders in Paris on Thursday. “Everyone tells you they want to cut spending, except their own spending. All the opposition parties tell you they want to accelerate in cutting debt, but keep proposing new spending.”
Italy has much more debt, exceeding 140% of output, about 30 percentage points higher than France. It has therefore proven much more exposed to financial-market speculation.
The extra yield investors demand to hold Italian 10-year bonds over equivalent German securities rose six basis points Thursday, reaching two percentage points for the first time since March.
Both Italy’s finance minister, Giancarlo Giorgetti, and Le Maire are pressing colleagues for a more flexible application of the EU rules to allow for time to return to the 3% deficit limit and debt at 60% of gross domestic product, and leeway on certain types of investments.
Spain, which has the presidency of the EU, is expected to present a proposal for agreement at a meeting of finance ministers in mid-October.
At a recent such gathering, France and Italy were already working together to persuade Germany to find a compromise solution, arguing that excessive pressure to reduce debt quickly could jeopardize economic growth.
Giorgetti, speaking on Wednesday, said that officials at the European Commission can appreciate Italy’s position.
“They’ll understand the situation, just as my European finance minister colleagues understand it as they struggle to manage economic slowdowns — and in some cases recession,” he said.
The EU rules were suspended during the Covid-19 pandemic and then again until the end of 2023 due to Russia’s invasion of Ukraine to allow governments more leeway for crisis spending.
As Le Maire acknowledged however, the problem with higher outlays is that it’s hard to cut them again.
“France’s salvation won’t come from more public spending,” he warned on Thursday. “If happiness were indexed to the level of public spending, we’d be the happiest people in the world.”
France’s habit of setting soft debt reduction targets — and often missing them — has come in for criticism from the country’s own institutions. Earlier this month, Bank of France Governor Francois Villeroy de Galhau said the government needed to show “increased commitment and credibility” in its fiscal plans.
Macron’s latest budget and long term spending plans are still lacking ambition, according to analysis from France’s public finances council, the HCFP. In an opinion on the 2014 budget Wednesday, the watchdog said forecast for a stabilization of public debt next year is “fragile” given optimistic forecast on economic growth and spending cuts.
–With assistance from Cagan Koc, Alonso Soto and Jorge Valero.
(Updates with bond spread in 12th paragraph)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.