The Financial Times is reporting that France's deficit is expected to exceed 3 per cent of GDP (link via Drezner). This would constitute a breach of the growth and stability pact unless France cuts public spending, which PM Raffarin refuses to promise to do. He doesn't want to break his campaign promise (tax cuts).
The European Commission is threatening give him a stern talking-to, and if he persists in not cutting the deficit, to slap him firmly on both wrists.
But really, what can the EU do to France? The governing agreement is article 104c of the Maastrict EC treaty (pdf) as expanded in the protocol on excessive deficits (pdf). (Read them yourself, but expect a headache.) Once a member state has been determined to have an excessive deficit by the European Commission, the Commission sends a report to the European Council. The Council must decide within three months if there is an excessive deficit. If so, they give the transgressing state up to four months to take steps to clean up its act. All of this happens privately.
If the member state fails to take action, the Council can make this information public. Incidentally, "taking action" means promising to take action, e.g., announcing austerity measures. The rule is:
The Council, when considering whether effective action has been taken in response to its recommendations made in accordance with Article 104(7), shall base its decision on publicly announced decisions by the Government of the Member State concerned.(I guess politicians never lie in the EC?)
Anyway, after ten months of this, the Commission can impose sanctions of between 0.2 and 0.5 percent of GDP per annum; the amount depends on the size of the deficit. The money must be deposited with the European Central bank and becomes forfeit if the bad behavior continues for two years, otherwise it's returned.
So, two years and ten months after the end of the fiscal year in which it ran an excessive deficit, a member state can be obliged to pay a fine of up to one-two hundredth of its GDP. Or, stated another way, a fine of up to 8.3% of its deficit. There are some teeth to this treaty, but they're blunt and far-off.
I sympathize with France's position. They're falling short of their predicted growth figures. (Though I wouldn't be surprised to find out that they'd picked the most optimistic growth number just to get another year of breathing room.) They had hoped to balance the budget by 2004, but it's always hard to balance the budget into a down economy. And now, with deflation looking much more serious than inflation, balancing the budget would be economic suicide.
(Why? With the economy in decline, tax revenues fall. Balancing the budget means reducing government spending to match tax revenues, which reduces government demand for private-sector services. If the economy is down because of lack of demand -- as is characteristic of a deflationary recession -- cutting government spending just accelerates the contraction. Remember, Herbert Hoover balanced the U.S. budget into a down and deflating economy. He also was keeping a campaign promise.)
So I do sympathize with France. They're in a tight spot and they want to spend their way out of it. It's too bad that the Monetary Union enabling treaties make that illegal.
Of course France wants a special exemption, and will probably get it over the objections of smaller EU member states. (Portugal didn't get one, after all.) But France is too large and powerful and important to offend. So the rules will probably be relaxed. It's a classic tragedy of the commons, and the EU members with strong economies (*cough* Finland) or who imposed fiscal discipline (*cough* Germany) will wind up paying the price.
I hope the U.S. government is willing to take the necessary steps to avoid serious deflation. Bring on the budget deficits! Lower taxes! Print more money! If things start to get bad, and sending Bush, Cheney and the ranking members of congress out to do lap dances would help, I say we do it. And since the U.S. hasn't ceded sovereignty over its federal budget to a multinational council, the measures we adopt will be free of foreign review.
Ah, sovereignty. I wonder if the Finns are getting nostalgia for it yet.
My wife: "Hey! The Vagina Monologues is coming to town before we go!"
Me: "That's nice."
"We could go together! Do you want to go?"
"No."
"Do you mind if I go by myself?"
"No."
"I think it would be really interesting. Are you sure you don't want to go?"
"Yes."
"I would go to The Penis Monologues."
"I wouldn't."