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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More by this author
 

Opinion

European governance

Can the EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read article
 

External Publication

European Parliament

Don't let up - The EU needs to maintain high standards for its banking sector as the European economy emerges from the COVID-19 pandemic

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Rebecca Christie and Monika Grzegorczyk Topic: Banking and capital markets, European Parliament Date: October 21, 2021
Read article
 

Blog Post

European governance

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: Lionel Guetta-Jeanrenaud and Guntram B. Wolff Topic: European governance, Macroeconomic policy Date: October 21, 2021
Read about event
 

Past Event

Past Event

Monetary policy in the time of climate change

How does climate change influence monetary policy in the eurozone? What potential monetary policy measures should be taken up to address climate risks?

Speakers: Cornelia Holthausen, Jean Pisani-Ferry and Guntram B. Wolff Topic: Green economy, Macroeconomic policy Date: October 20, 2021
Read article More by this author
 

Podcast

Podcast

Rethinking fiscal policy

A look at the past, present and future of fiscal policy in the European Union with Chief economist of the European Stability Mechanism, Rolf Strauch.

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: October 20, 2021
Read article More on this topic More by this author
 

Blog Post

Better sustainability data is still needed to accelerate the low-carbon transition in capital markets

Investors need more trustworthy sustainability data. Regulators should leave space for better products to emerge, while remaining alert to well-known patterns of misconduct in capital markets.

By: Alexander Lehmann Topic: Banking and capital markets Date: October 18, 2021
Read about event More on this topic
 

Upcoming Event

Nov
4
14:00

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Grégory Claeys and Wolfgang Lemke Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read about event More on this topic
 

Past Event

Past Event

What is the link between biodiversity loss and financial instability?

Biodiversity loss impacts financial stability. How big is the risk of biodiversity loss for financial institutions?

Speakers: Sylvie Goulard, Romain Svartzman, Guntram B. Wolff and Michael Wilkins Topic: Banking and capital markets Date: October 5, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More by this author
 

Podcast

Podcast

A green fiscal pact

How can the European Union increase green public investment while consolidating budget deficits?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: September 29, 2021
Load more posts