On Friday the European Commission releases its latest economic outlook. It will almost certainly confirm that several eurozone countries will miss their fiscal targets. In the previous round of forecasts, published in November, France was expected to record a budget deficit of 3.5 per cent of gross domestic product in 2013, in excess of the 3 per cent limit set down by the Maastricht treaty. Overruns are also expected for Belgium and Slovakia, while the forecast for the Netherlands’ deficit was a not-so-safe 2.9 per cent. The eurozone economy performed poorly during the end of 2012: there are reasons to fear a worse forecast for 2013. Jean-Marc Ayrault, France’s prime minister, has already declared that the 3 per cent target will be missed.
When he presents the forecasts on Friday, should Olli Rehn, the commission’s vice-president, coerce governments in France and other countries into further adjustment to ensure they meet their 2013 deficit targets? Or should he give them more time? It is a difficult balancing act.
The case for being tough rests on an argument about credibility. In 2003, France and Germany built a coalition to rebut the commission’s recommendations on deficits and put the stability and growth pact “in abeyance”. Over the past decade, France has been a serial breaker of the rules outlined in the pact. Today, the situation is worse. The 0.8 per cent growth forecast underpinning the French 2013 budget was already questionable on the day it was announced. A soft stance vis-à-vis Paris would certainly lead many in Europe and beyond to question the credibility of the new fiscal framework. If Brussels is not able to discipline France, then will anyone take it seriously?
On the other hand, the case for being flexible rests on an economic and on a political argument. Immediate fiscal adjustment in countries that have kept access to capital markets is not what Europe needs. According to the commission’s November calculations, France in 2013 will be cutting its deficit by 1.3 per cent of GDP in structural terms, though the government claims it is doing more. This is significant for a country whose output has been flat for almost two years. Further tightening would entail more serious economic damage than if applied in a recovery. Furthermore, it could elicit political resistance. The electoral debate in Italy, where GDP is below its 2009 trough, shows that austerity fatigue has set in. Fiscal consolidation is a marathon; the commission should not push the runners into political exhaustion.
So what to do? First, Mr Rehn should tell France than any spending over-run with respect to the budget adopted at end-2012 should be entirely offset in 2013 already. Hard times should not serve as an excuse for slippages.
Second, the commission should request from Paris a serious plan for public spending cuts in the years to come. The French 2013 adjustment was mostly based on tax increases. The government has announced that further consolidations would come from public spending cuts and it has pencilled in €60bn of those. This is, however, a rather weak commitment because President François Hollande has not spelt out precise priorities, let alone targets. So the commission should condition flexibility for 2013 on a decision by Paris on the targets, timetable and process for a comprehensive public spending review. It is not enough to say that some government spending will be cut. France must say which and when.
If these conditions are met, Mr Rehn should accept that revenue shortfalls attributable to a lower GDP do not need to be offset in the course of this year. And it should apply the same approach to other countries in similar situations. After all, the new fiscal treaty that entered into force on January 1 relies on structural, rather than headline, targets. Firmness on the former and flexibility on the latter would be in full accordance with the philosophy of the treaty.
The writer is a French economist and director of Bruegel, a Brussels-based think-tank focusing on global economic policy making