What is the "Excessive Deficit Procedure" threatening France?

The Maastricht criteria and the 3% rule

The Excessive Deficit Procedure (EDP) originates from the convergence criteria established by the Maastricht Treaty in 1992. These criteria, also known as the « Maastricht criteria », are conditions that member states were initially required to comply with to join and remain in the euro zone. It was reinforced by the 1997 Stability and Growth Pact (SGP), which imposes strict budgetary rules on euro zone countries.

The idea of the EDP was born out of the need to ensure prudent budgetary management of EU member states. With the creation of the euro zone, it became essential for them to monitor and control public deficits in different countries to avoid economic imbalances that could threaten the entire monetary union.

Since its introduction, the EDP has evolved to meet growing economic challenges. Reforms have been implemented to strengthen the budgetary framework and ensure better monitoring of member states' public finances.

The Maastricht criteria are economic conditions that countries must meet to join the euro zone. They include specific thresholds for inflation, interest rates, the budget deficit, and public debt.

The deficit and debt criteria are particularly important. They state that a member state's public deficit should not exceed 3% of GDP, and the public debt must remain below 60% of GDP. These limits, deemed essential for ensuring fiscal stability by those who established them, are far from being met by several European countries, including France.

Annonce

The Commission identifies weaknesses and imposes corrective actions

The European Commission monitors the public finances of Member States and identifies situations of excessive deficit in relation to established criteria. The Excessive Deficit Procedure can be triggered when a Member State surpasses the defined thresholds of deficit or public debt.

The formal process begins with the identification phase, which consists of determining whether a Member State presents an excessive deficit. The European Commission analyzes budgetary data and then publishes a preliminary report.

If an excessive deficit is observed, the Commission issues a recommendation to the EU Council, which then adopts formal recommendations to the concerned Member State. These recommendations include specific measures that the State must take to reduce its deficit.

The correction phase is the implementation of the recommended measures. The Member State must take corrective actions to bring its deficit below the defined thresholds. The Commission monitors the application of these measures and makes regular reports.
Corrective measures may include reductions in public spending, tax increases, or structural reforms aimed at improving economic efficiency. The goal is to bring the deficit below the threshold of 3% of GDP.

In case of persistent non-compliance, the Member State may face financial sanctions. These can range from a lump-sum fine to the suspension of European funds. The Council is also involved in the application of sanctions in case of non-compliance.

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An excessive deficit procedure against France lasted from 2009 to 2018

In 2009, France was placed under Excessive Deficit Procedure (EDP) by the European Union. The French public deficit had reached 3.2% of the GDP in 2008, and forecasts indicated a worsening to 5.4% in 2009.

To meet the requirements of the EDP, France implemented several austerity measures and structural reforms. The reduction of public expenditure was a priority, notably with cuts in health and education budgets.

Alongside, France eliminated some tax loopholes and raised the standard VAT from 19.6% to 20%. This increase was part of the efforts to boost revenues and help reduce the budget deficit. Among other notable reforms were changes to the labor market aiming to make hiring and firing more flexible, which was hailed by the European Commission as a significant structural effort but was strongly contested by the French. Parallelly, strengthening the tax administration improved tax collection and fought against tax evasion.

In 2017, France's public deficit fell back below the 3% mark, reaching 2.6% of the GDP. This significant improvement led the European Commission to recommend France's exit from the EDP in May 2018. The decision was officially approved in June 2018, marking the end of nine years of strict oversight and corrective measures.

By 2024, France's public deficit is projected at 5.1% of the GDP, slightly down from the 5.5% in 2023. Public debt now reaches the historical amount of 3100 billion euros, or 112.3% of the GDP. For comparison, it was 1300 billion on the eve of the 2008 crisis, about 68% of the GDP.

While France has managed to exit the EDP, challenges remain, notably reducing public debt which remains high. The European Commission continues to urge France to pursue its economic reforms, including in the fields of education, training, and labor market competitiveness.

The terrible example of the Greek crisis

The Greek sovereign debt crisis, which arose in 2009 following the global financial crisis, led to the activation of the Excessive Deficit Procedure (EDP) and significant interventions by the European Union, the European Central Bank (ECB), and the International Monetary Fund (IMF). That year, its debt stood at 126% of GDP and its deficit at 12.7% of GDP. Despite painful efforts resulting in deficit reduction, the debt continued to increase, reaching a peak of 207% in 2020. Since then, it has been slowly decreasing, having reached 161.9% at the end of 2023.

In 2010, a first bailout plan amounting to 110 billion euros was granted by the European Union and the IMF. In exchange for this loan, Greece had to commit to implementing rigorous austerity measures and structural reforms. In 2012, a second bailout plan of 130 billion euros was implemented, accompanied by a restructuring of Greek debt, reducing its nominal value by approximately 53% for private creditors. More in-depth reforms were demanded, including budget cuts and labor market reforms. In 2015, a third program of 86 billion euros was granted by the European Stability Mechanism (ESM), subject to Greece continuing to implement austerity measures and carry out economic reforms.

To meet the requirements of the bailout plans, Greece implemented several austerity measures. This included reducing public spending, notably by lowering civil servant wages, reducing pensions, and eliminating bonuses and benefits in the public sector. Parallelly, Greece increased taxes by raising VAT and introducing new taxes on goods and services, as well as increasing taxes on fuel, tobacco, and alcohol. Pension system reforms were also carried out, such as raising the retirement age, reducing the benefits of early retirement, and structural reforms aimed at making the pension system more sustainable in the long term.

Greece undertook significant structural reforms to liberalize its economy. This included market liberalization, with labor market reforms to make hiring and dismissal more flexible, as well as opening up certain regulated professions to competition. In addition, privatisations were carried out, with the sale of public assets, including public companies and infrastructure like ports and airports, in order to reduce public debt through privatisation revenues. To strengthen tax administration, Greece modernized and digitalized its tax services, fought tax evasion, and improved tax collection.

The austerity measures and reforms have significant economic and social consequences for Greece. The country experienced a deep recession, with an economic contraction of over 25% between 2008 and 2013, and unemployment soared to record levels, reaching over 27% in 2013. However, the austerity measures and reforms managed to reduce Greece's budget deficit, though this came at the cost of severe social and economic tensions. The austerity measures also led to mass protests and political instability, with several changes of government during the crisis.