Did France, Italy Just Get Away with Breaking the Rules?

France and Italy make small budgets adjustments to avoid a confrontation with the European Commission.

Italian prime minister Matteo Renzi is welcomed by French president François Hollande in Paris, March 15
Italian prime minister Matteo Renzi is welcomed by French president François Hollande in Paris, March 15 (Elysée)

The European Commission provisionally accepted France’s and Italy’s budget proposals for 2015 on Tuesday, saying it could not “immediately identify cases of ‘particularly serious noncompliance’ which would oblige [it] to consider a negative opinion at this stage in the process.”

Days earlier, the eurozone’s second- and third largest economies had been told their budgets fell short of what was expected and could breach the bloc’s fiscal rules. So what changed?

Earlier this month, France and Italy revised their growth forecasts for next year downward but refused to consider additional austerity measures to bring their debts and deficits in line with the eurozone’s treaty limits.

France said it would once again fail to reduce its shortfall to under 3 percent of economic output, the deficit ceiling for countries in the single currency area. Its deadline to do so had already been extended from 2013. But it coupled the announcement with promises to deregulate intercity bus transport, regulated professions such as chemists and notaries as well as shopping hours, apparently hoping to convince the European Commission to give it more time for fiscal consolidation.

Italy would honor the 3 percent limit but delayed plans to bring its deficit into structural balance until 2017. Its debt, at over 130 percent of gross domestic product, also far exceeds the eurozone’s ceiling. However, Prime Minister Matteo Renzi is pursing labor reforms as part of a wider liberalization agenda that should improve Italy’s competitiveness relative to other countries in Europe.

Despite earlier insisting they would accept no diktats from Brussels, both France and Italy submitted budget adjustments, the former promising an extra €3.6 billion in deficit reduction and the latter proposing €4.5 billion more cuts. To achieve the number, Italy would scrap €3.3 billion worth of planned tax cuts.

While the measures aren’t necessarily structural and might not allow both countries to quite meet their earlier commitments, the changes could at least satisfy smaller euro states such as Greece, Ireland and Portugal that have had to make much tougher budget adjustments and would have been appalled if big countries were to get away with bending the rules.

The European Commission’s final fiat for all eurozone states’ budgets should come in November when it has completed a detailed assessment of their spending plans.