French Budget Overshoot: Say Goodbye To The Stability Pact

The stability pact was always an illusion but Macron's minimum wage hike will put a huge spotlight on France and Italy.

Let's recap events in Italy and France that led to this EU predicament.

In an unprecedented move on October 23, the EU Rebuked Italy's Budget. In response, Savini Threatened a Government Collapse and New Elections.

The EU demanded Italy reduce its budget deficit to 2.0% of GDP. Italy insisted on 2.4%. After the threats and counter-threats, the sides agreed to talk.

Note that France gets a deficit of 3.0% but Italy only 2.0%. This is because Italy's debt is higher. In practice, one ever honored any of these "stability pact" rules, including Germany.

Meanwhile, France just threw a wrench into the already clogged stability pact machinery.

In case you missed it, France Suspends Diesel Tax Hike over the riots. Then when that did not quiet the protests, I noted Macron Attempts to Placate Yellow Vest Protesters With Free Money.

The French deficit was 3.0% but thanks to the yellow vest riots, and Macron's response, the French deficit is now estimated to be 3.6%.

Free Money

Q. How did Macron accomplish his free money miracle?

A. By a "monthly government bonus".

Oops, that blows the budget.

With that backdrop let's tune into Eurointelligence for some color commentary.

Stability Pact Overshoot

The spending promises from Macron's speech, together with the postponement of the carbon tax, imply about €11bn less money in the 2019 budget, according to Les Échos. And this is not the only financial fallout from the gilets jaunes movement. The Banque de France already slashed its forecast for Q4 from 0.4% down to 0.2% given the the impact of the ongoing protests on retailers. For next year the finance ministry expects €4bn less income due to lower growth figures, according to the paper's sources. This could push up the deficit to 3.6% of GDP next year.

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