E.U. Budget Clearance for France and Italy Comes With an Asterisk

http://www.nytimes.com/2014/10/30/business/international/budget-france-italy-european-union.html

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BRUSSELS — A day after giving France and Italy a provisional pass on their budget plans for next year, a top European Union official warned on Wednesday that those countries could still face disciplinary action for violating the bloc’s fiscal rules if the revised budgets did not pass muster.

The official, Jyrki Katainen, the European commissioner for economic and monetary affairs, said at a news conference in Brussels that despite his decision not to request that France and Italy redraft their 2015 budgets, their filings would face tough scrutiny. The two countries, which had initially submitted budgets that missed the union’s mandated targets by wide margins, announced further spending cuts this week.

“I want to underline that this does not mean that all draft budgetary plans will necessarily be found to be in full compliance with the Stability and Growth Pact,” Mr. Katainen said, referring to the European Union’s budget rule book. “We are not prejudging the outcome,” he said.

Mr. Katainen has been walking a tightrope in recent weeks. Cracking down too heavily on France and Italy could have forced more belt-tightening at a time of rising concern about the inability of the European economy to resume growth. Rejecting the budgets outright could have prompted battles with Paris and Rome that Brussels might not have been able to win.

But Mr. Katainen was also under pressure to ensure that governments abide by the European Union’s fiscal rules — routinely flouted over the last decade by large member states, including Germany, which has preached budget discipline to other countries in the eurozone. A failure to police those rules risks making international investors more jittery about Europe’s ability to stave off another sovereign debt crisis.

In recent weeks, Germany had indicated that it still expected France and other eurozone countries to do their best to meet the European Union’s deficit targets, even though the German economy has stalled (the weakness of its European Union neighbors is a reason German exports have been falling).

The German Finance Ministry declined to comment on Wednesday on the latest turn in the Brussels budget negotiations. “We have always said this is a matter for the commission,” Nadine Kalwey, a spokeswoman for the ministry, said. She was referring to the European Commission, the executive arm of the European Union.

Once the commission has examined and delivered judgment, she noted, the budgets would go to the Eurogroup, which is made up of finance ministers from countries in the eurozone. “That’s what we have to wait for.”

The European Commission had to decide by Wednesday if it would request that countries found to be widely out of step with the rules redraft their budgets. But promises by France and Italy to make serious budget-cutting efforts defused the standoff.

The European rules call for a nominal deficit of no more than 3 percent of gross domestic product. As part of that effort, countries are also required to reduce their structural deficits — the difference between revenue and spending when the effects of the economic cycle are stripped out — by an amount tailored to each country’s nominal deficit and national debt.

France’s revision represents “a significant improvement,” Mr. Katainen said on Wednesday. But he added that the commission needed more time to analyze the numbers and make a final judgment, he said.

Mr. Katainen also warned that countries like France that are already under formal scrutiny — a process known in Brussels jargon as an excessive deficit procedure — needed to be sure to make corrections. “At the end of this path is the possibility of fines,” he said.

In the case of Italy, Mr. Katainen said that the government had “engaged constructively” with the commission on its budget submission. But he also said that further assessment was necessary and that Italy needed to make good on its promises of overhauls. “Good plans, which would change Italy’s growth — potentially substantially — should be adopted by both houses of Parliament and implemented,” he said.

The next hurdle for Prime Minister Matteo Renzi of Italy is avoiding the watch list of the excessive deficit procedure, which would bring much closer monitoring of his country’s finances. It could also lead to fines if the country was to fail to show it was making enough of an effort to control its debt.

The budget assessments come as the guard is changing in Brussels. On Saturday, a new team will take office at the European Commission under the presidency of Jean-Claude Juncker, a former prime minister of Luxembourg and the former chief of the Eurogroup.

Responsibility for future decisions on France and Italy will be shared between Valdis Dombrovskis, a former prime minister of Latvia who will take a senior role overseeing the euro; and Pierre Moscovici, a former French finance minister, who will succeed Mr. Katainen on economic and monetary affairs.

Mr. Katainen will stay at the commission, but in a senior role overseeing jobs, growth and competitiveness.