Blog Post

Why France will have no budget rule

Like in other countries, the French Constitutional Council was asked to decide on the compatibility of the European fiscal treaty with the Constitution. The decision was actually requested by president François Hollande because of a legal uncertainty: would the provision of Art 3(2) according to which the rule limiting the structural budget deficit to 0.5 percent of GDP has to “take effect in the national law [..] through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budget process” require changing the French Constitution?

By: Date: October 10, 2012 Topic: Banking and capital markets

Like in other countries, the French Constitutional Council was asked to decide on the compatibility of the European fiscal treaty with the Constitution. The decision was actually requested by president François Hollande because of a legal uncertainty: would the provision of Art 3(2) according to which the rule limiting the structural budget deficit to 0.5 percent of GDP has to “take effect in the national law [..] through provisions of binding force and permanent character, preferably constitutional, or otherwise guaranteed to be fully respected and adhered to throughout the national budget process” require changing the French Constitution?

Constitutional amendments are rather frequent in France but they require either a referendum or a vote by a 3/5th majority in the so-called Congress composed of the National Assembly and the Senate. Choosing the first route would have been risky: French voters rejected the European constitutional treaty in 2005 and recent polls indicate rising anger against EU institutions. Choosing the second would have been without risk but not without cost: President Hollande would have had to rely on support from the opposition and would have exposed divisions within his own camp as some members of it would certainly have refrained from supporting the amendment.

Fortunately for him the Council has ruled that there is no need to change the Constitution. But the details are important. The French constitutional judges have not read Art 3(2) as implying that provisions of binding force and permanent character can either be constitutional or of lower ranking. Rather, they have interpreted it as offering an alternative between constitutional provisions of binding force and permanent character AND non-constitutional, non-binding and permanent provisions. This is very clear in paragraphs 19 and 21 of the decision (in French): binding and permanent provisions are not mandatory, but provisions of such character would need to have constitutional ranking. In other words France can only equip itself with a numerical rule if it changes its Constitution. Otherwise it must rely on procedural provisions.

This reading may come as a surprise for some of France’s partners in the EU but the reason for it is very simple: the French hierarchy of laws includes three levels, the Constitution, institutional acts (loi organiques) and regular laws, but institutional acts are meant to deal with procedures, not substance. Therefore a budget rule can either have constitutional standing, or be prescribed by a regular law, but cannot have intermediate standing.

The Elysée has already indicated that it will not aim at a constitutional revision. So there will be no numerical rule to speak of. What can be expected is that the French government will propose a strengthening of the institutional framework for budgetary decision-making, most probably through beefing-up multiannual public finances guidelines, creating an independent fiscal council and introducing a stricter monitoring of the execution of the budget. (Limited) proposals to this end were made already in 2010 in the report of a committee chaired by former IMF MD Michel Camdessus.              

The question is whether Hollande will aim for a reform ambitious enough to correct the deficit bias resulting from the combination of a gargantuan appetite for public spending and a robust reluctance to taxation. In theory strong procedures can do as well as mechanical rules, if no better. As Charles Wyplosz put it in a 2002 article, rules and institutional reforms are two means to the same end, and the lesson from monetary policy is that institutions can be do better than rules. To elicit confidence, however, France now needs to embark on serious institutional reform, set itself constraints, and limits the scope of discretionary decisions. This is not the easiest of choices for a country where politicians have traditionally been reluctant to tying their own hands.


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