Toothless Barking Dogs; Don't Like the Rules? Then Ignore Them: French Style

Don't Like the Rules? Then Ignore Them: French Style

When it comes to fiscal policy in the EU, you can break whatever fiscal rules you want, provided you are big enough.

France qualifies, so does Germany. If you are small like Greece and Cyprus, then you may find yourself in bed with the Troika.

For the third time France Warns of Budget Overshoot

France has declared it will heavily overshoot its already twice-delayed budget deficit target next year, setting up tough negotiations with European partners previously reluctant to grant Paris more time to bring its public finances within EU limits.

Michel Sapin, finance minister, announced that the required deficit target of 3 per cent of national output was being pushed back a further two years to 2017 in the latest sign of the deep-seated economic problems confronting President François Hollande and his socialist government.

Mr Sapin said the deficit would reach 4.3 per cent of gross domestic product in 2015 after a level of 4.4 per cent this year – the latter also a big overshoot of earlier estimates and the first annual rise in the deficit for several years.

He blamed the situation on the slow rate of economic growth and low inflation, saying France demanded that the EU “collectively take into account” an economic slump “unprecedented in recent European history”.

Joke of the Day

The German finance ministry said: "We assume that all member countries of the eurozone stick to the rules. Otherwise we risk our credibility."

Credibility? What credibility? How can anyone speak about credibility when France , Spain, and Italy miss deficit targets over and over and over again?

Toothless Howling Dogs

Like toothless howling dogs, Eurozone Leaders Warn on Fiscal Rules, shortly after the French budget announcement.

Eurozone leaders warned the currency bloc risks facing a new market backlash if it strays from its fiscal rules, an apparent message to France and Italy that their push for more flexibility will be viewed sceptically when they submit their budgets to Brussels next month.

The admonition, from leaders of the European Commission, European Central Bank and eurozone finance ministers, came just 48 hours after the French government announced it would blow through the EU’s budget deficit limit of 3 per cent of economic output next year. Instead, Paris projected a 4.3 per cent deficit.

EU officials said ministers from smaller countries who have already implemented tough reforms complained during a closed-door session that any loosening of the rules now would be seen as double standards.

The debate over how much flexibility the European Commission will allow Paris and Rome threatens to become one of the most contentious political issues facing the EU. An Italian-led group of struggling economies has pushed for the rules to be interpreted leniently, arguing the lack of public spending is exacerbating what is threatening to become a triple-dip recession.

In a tweet on Thursday, Matteo Renzi, Italy’s prime minister, said his country did not “expect to be lectured by EU,” calling for a swift implementation of a €300bn investment plan mooted by the new European Commission president Jean-Claude Juncker.

As part of a push to stimulate growth, Mr Draghi last week announced a plan to purchase asset-backed securities held by eurozone banks. He also urged national governments to guarantee the riskier portions of the securities to free up cash for loans to consumers and businesses.

Both France and Germany have indicated they oppose such government guarantees, however, and Mr Dijsselbloem said the Netherlands, where banks hold significant quantities of mortgage debt, would also not guarantee such purchases.

Expect Nothing But Howls

Will the EU do anything about France? Other than yapping and shifting deficit timelines "for the last time" the answer is the same as always: Of course not.

And will France, Germany, and the Netherlands do what the ECB wants in regards to guaranteeing debt? Apparently not, and they would be foolish to do so.

Will there be any major stimulus efforts like France and Italy want? No again. Germany and the Netherlands won't go along.

Instead, expect all the dogs to remain seated in a big circle, howling at each other as well as the moon, without giving the slightest look at one of the basic problems, the euro itself.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com