France Reduces Deficit Below EU’s 3% of GDP

The European Council closed the excessive deficit procedure for France, confirming that it has reduced its deficit below the EU’s 3% of GDP reference value.

The council thereby abrogated its decision of April 2009 on the existence of an excessive deficit in France. Member states are required by article 126 of the Treaty on the Functioning of the European Union to avoid excessive government deficits. The procedure is used to support a return to sound fiscal positions, Eurasiareview reported.

Once it has exited an excessive deficit procedure, a member state is subject to the preventive arm of the EU’s fiscal rulebook, the Stability and Growth Pact.

Procedures were open for 24 member states in 2010-11 at the height of the euro crisis. Now only one (Spain) remains subject to an excessive deficit procedure.

France’s general government deficit amounted to 2.6% of GDP in 2017, down from 3.4% of GDP in 2016. The commission’s spring 2018 economic forecast projects deficits of 2.3% of GDP in 2018 and 2.8% of GDP in 2019, thus remaining below the EU’s 3% of GDP reference value over the forecast horizon.

The structural balance, which is the general government balance adjusted for the economic cycle and net of one-off and other temporary measures, improved by 0.5% of GDP in 2017. The accumulated improvement in the structural balance since 2015 amounted to 0.7% of GDP.

The ratio of gross government debt to GDP increased to 97.0% in 2017 from 96.6% in 2016, mainly due to debt-increasing stock flow adjustments. The commission’s spring 2018 forecast projects the debt ratio to decrease in 2018 and 2019, to 96.4% and 96.0% respectively, with high nominal economic growth outweighing primary deficits and interest payments.

France has been subject to an excessive deficit procedure since April 2009, when the council called for its deficit to be corrected by 2012.

In the light of the latest data, the council concluded that France’s deficit has now been corrected.

Stronger Activity

French business activity perked up unexpectedly in June as a stronger than expected service sector made up for a softer manufacturing sector, a survey published on Friday showed, Reuters reported.

Data compiler IHS Markit said its preliminary composite purchasing managers index, comprising both sectors, rose in June to 55.6 from 54.2 in May.

That beat economists’ average expectations in a Reuters poll for a stable reading and brought the index further away from the 50-point line dividing an expansion in activity from a contraction.

IHS Markit economist Paul Smith said that the reading was consistent with quarterly economic growth of 0.3% this quarter. “France’s economy showed noticeably divergent trends at the end of the second quarter, with the manufacturing and service sectors heading in markedly different growth directions,” he said.

While the dominant and more domestically focused service sector was benefiting from improved demand at home, manufacturers were seeing weaker export demand as well as growing price pressures, he said. The service sector PMI rose to 56.4 from 54.3 in May, easily beating economists' expectations on average for a steady reading of 54.3.

Meanwhile, in the manufacturing sector, the PMI eased back to a 16-month low 53.1 from 54.4 in May, falling short of expectations for a reading of 53.9.

The flow of manufacturers’ new orders was the weakest since February 2017 but capacity pressures kept factories busy working off backlogs of unfinished work. Meanwhile, in the service sector, IHS Markit said panelists reported success turning firmer market demand into new contract wins.

Meanwhile, the much awaited rebound in eurozone growth momentum may have finally begun.

A gauge measuring private-sector activity unexpectedly increased in June, suggesting the economy is gathering pace after a slow start to the year. With output strengthening in the bloc’s two largest economies, Germany and France, the numbers underpin the European Central Bank’s prediction that a rebound is on the cards, even if it arrives later than expected.

But the better figures comes amid the shadow of a looming trade war, with the US and Europe announcing tit-for-tat tariffs on products.