Brussels approves France’s revised, post-attack deficit

Brussels approves France’s revised, post-attack deficit

What are the impacts of France’s security pact announced in the wake of the Paris attacks? Does it mark a readjustment between political imperatives and EU budgetary discipline?

France to increase security spending

“In these exceptional circumstances, I consider that the security pact prevails over the stability pact” said French President François Hollande on November 16th during an extraordinary sitting of both houses of Parliament in Versailles.

After having decided to prolong the state of emergency for the next three months, Hollande announced the creation of 5,000 additional police and gendarme jobs, 2,500 in justice and 1,000 in custom administration.

These measures come in the wake of the Charlie Hebdo attacks last January, when Hollande decided to revise the military planning law to free up an additional €3.8 billion between 2016 and 2019. In total, about 9,218 jobs in the Army initially slotted for termination will be preserved.

Confronted to such developments, Paris has reiterated the need for Europe to share the burden of collective defence. France, which has recently contributed extensive military assets in the MENA region (in the name of European security,) now wants to refocus a portion of its resources to the defence of its national territory. As a comparison, defence spending stands at 1.6% of GDP in France while it is around 1.08% in Germany and 0.78% in Spain.

Other voices in France have called for certain military expenditures (primarily external operations) to not be counted towards the current budget deficit. If such changes were implemented, France’s deficit could have been reduced by up to a billion euro last year.

Tinkering with government deficit: towards a change in European orthodoxy?

Since the global financial crisis struck in 2008, France has been pinpointed for not complying with the Maastricht convergence criteria, as its budget deficit has been unable to drop below the maximum 3% of GDP threshold.

Last February, after extensive negotiations, the European Commission agreed to allow an additional two year delay for France to comply with the 3% rule. Under Hollande’s mandate, Paris has therefore committed itself to bringing its budget deficit from 3.8% of GDP in 2015 to 3.3% in 2016, and then to 2.7% in 2017.

On November 19th, French Finance Minister Michel Sapin announced that additional security measures will lead to extra expenses totalling €600 million in 2016, adding that France’s budget strategy will “remain unchanged”. However, on November 30th, following a series of amendments by the government, extra costs have been re-evaluated by 35%, reaching a total of €815 million in 2016. Said re-evaluation was induced by unaccounted pension costs (€70 million) and additional credits allocated to the Army to finance external military operations in Syria (€100 million).

Specifically, the security pact foresees an additional €325 million for the Ministry of Interior, €250 million for the Ministry of Justice, €100 million for the Ministry of Defence, €36 million for customs administration and €24 million for the French external intelligence agency (DGSE).

With this additional spending, France is at risk of breaking Brussels’ budgetary rules. Although its budget should broadly conform with intermediary targets for 2015 and 2016, it is unlikely that Paris will manage to bring its budget shortfall below 3 % by 2017; thus remaining one of the longest budget offenders in the Eurozone.

In the face of current security and migration challenges (two phenomenon to clearly dissociate), Brussels has voiced sympathy, starting to show some signs of flexibility regarding budgetary compliance. The Junker Commission recently made it clear that it will take into consideration, on a case-by-case basis, extraordinary costs induced by increasing defence expenditure and unprecedented refugee influx in the assessment of EU countries’ budget plans for the coming year. This shows that, when necessary, the European Commission can be political and consider the precedence of political challenges over budgetary rules.

France sees short-lived drop in tourism and leisure

The long-term economic impact of the November 13th terror attacks remains uncertain. According to recent evaluations from the French Treasury Department, the attacks could induce a 0.1 percent decline in GDP in the following months, or around €2 billion.

Some sectors (travel, tourism and leisure) are already noticing the impact of the attacks more than others. In the aftermath of the attacks, hotel and restaurant bookings dropped between 25 to 50%. This could represent a 20-25% revenue loss in the coming months. Similarly, The Louvre and the Musée d’Orsay both recorded a 30% decrease in visitors compared to the week before the attacks, while in the Centre Pompidou, tickets sales halved. By comparison, hotel revenues only dropped by 7-8% in the two days following the Charlie Hebdo attacks (hotel occupancy decreasing by less than 1% by the end of August).

Despite these recent figures, the long-term impact of the November 13th attacks is likely to remain relatively soft and will rather depend on how the French people react to these events. Indeed, it must be noted that following the January attacks, France still witnessed a 0.7 percent increase in growth GDP for the first quarter (0.0 percent for the second quarter and +0.3 percent for the third quarter).

Growth prospects, which remain easily reversible due to weak foreign trade, will depend heavily on consumer consumption and business investment. European competitiveness is also expected to continue to benefit from the positive effects of a weak Euro (having seen a 20% decline against the Dollar over the past year), although its long-term effects should not be overestimated. Infrastructure, the environment, health, and education must also, despite the current situation marked by new internal and external security challenges, remain key prospective sectors to watch and invest in.

Categories: Europe, Security

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