BRUSSELS / PARIS ― The French government has been told by the European Commission it urgently needs to adjust next year’s spending plans to fall into line with the EU’s debt and deficit rules when they return after a four-year suspension.
Paris is among four governments handed warnings over their budget plans by the bloc’s executive in its role policing member countries’ public expenditure. The rules, aimed at preventing instability in financial markets and the build-up of public debt, will retake effect on January 1 after they were shelved to allow greater investment during and after the COVID pandemic.
“France’s draft budgetary plan risks not being in line” with the bloc’s rules, Commission Vice President Valdis Dombrovskis told reporters in Strasbourg, pointing to rising public expenditure and insufficient cuts to energy support.
Belgium, Finland, and Croatia fall into the same category, the Commission said in its statement on Wednesday. Ignoring warnings could trigger a so-called Excess Deficit Procedure, a lengthy process that includes specific demands to rein in spending and potentially concludes with financial sanctions.
These reports cards, and the resumption of the Stability and Growth Pact rules in general, come at a critical time with Europe’s economic growth remaining feeble and high interest rates making borrowing more expensive. Russia’s war in Ukraine and growing tensions in the Middle East add to uncertainty for governments and central banks in Europe and beyond.
‘Whatever it takes’
Pressure on France shifts the focus from Italy, which has long been considered the bad boy of Europe when it comes to public spending. Rome isn’t fully out of the woods: its budget is “not fully in line” with the rules, the Commission said. The same goes for Austria, Germany, Luxembourg, Latvia, Malta, Netherlands, Portugal and Slovakia.
French Finance Minister Bruno Le Maire has repeatedly stressed that France’s 2024 budget would mark the end of the era of “whatever it takes” in economic spending, pledging to phase out emergency measures linked to the pandemic and the energy crisis.
As the Commission announced its assessments, a French economy ministry official was quick to stress Paris was unlikely to be punished with an Excessive Deficit Procedure and that it would not need to modify its budget law.
“We won’t have to take any adjustment measure on this evolution of primary net spending,” the official said, on condition of anonymity, noting that the gap between France’s spending and Brussels’ recommendation was “very small.”
The official insisted that, contrary to other EU countries, France did not receive a written request from Brussels.
Paris sees a deficit next year of 4.4 percent of GDP — exceeding the EU’s 3 percent threshold — and spending cuts of €5 billion. The French budget is still being discussed in the country’s parliament and is set to be approved by Christmas.
Commission Vice President Valdis Dombrovskis | Kenzo Tribouillard/AFP via Getty Images
The Commission also raised concerns France’s debt-to-GDP ratio will rise to 110 percent of GDP next year. The EU’s limit is 60 percent.
‘Because it’s France’
Brussels is under some pressure to show it is serious about enforcing the EU’s deficit and debt rules, regardless of whether governments can agree on their overhaul by the end of the year — a deal that France is trying to broker. The EU wants to make them more flexible and better tailored to individual countries’ circumstances but Germany is leading a group of governments demanding that some strict targets over debt and deficit reduction remain.
France’s violation of the deficit criteria means the Commission could theoretically launch an “excessive deficit procedure” (EDP) from next spring — a red-flag label that means offending countries must adjust their spending.
The French case is particularly sensitive because Paris has received special treatment before. In 2016, the Commission’s last president, Jean-Claude Juncker, justified his decision to give Paris leeway on its budget wrongdoing merely “because it is France.”
This article has been updated with quotes from Strasbourg and Paris.
The European Commission is dropping a plan to reallocate multinationals’ profits among European Union countries in a new framework for taxing large corporates at EU level due Tuesday, according to draft proposals obtained by POLITICO.
Commission President Ursula von der Leyen last year pledged “a single set of tax rules for doing business in Europe.”
The EU executive originally wanted to go for “formulary apportionment,” or a formula splitting the total pre-tax profit earned by multinationals between the jurisdictions where it does business based on where value is created.
But that option received a lot of pushback from countries afraid of losing tax revenue. Countries with comparatively low corporate tax, like Ireland or Lithuania, would miss out on the tax bill of large companies that benefited from booking profits with them, instead having to file their tax returns where they make their sales, or where they keep most of their workforce or productive assets.
Instead, the EU executive will suggest that multinational companies with annual revenues of over €750 millionpool their tax bills, in what the Commission calls an aggregate tax base. Oil and gas, shipping and aviation groups are excluded from the proposal.
In practice, companies keep paying taxes to different countries based on national tax rates, but would do so under an EU framework on what is taxable.
For a seven-year transition phase, each company will be taxed according to its share of the aggregate tax base, calculated as their average taxable income over the past three years.
The Commission’s hope is to“pave the way for a permanent allocation method that could be based on formulary apportionment,” it wrote.
The goal is to allow multinationals to more easily claim cross-border compensation of losses, as well as give more certainty to businesses active across borders on their tax bills.
“We try to maximize benefits for businesses without rocking the boat for finance ministers,” said one EU official.
This approach was criticized by MEP Paul Tang, a Dutch socialist who’s the chair of the European Parliament’s subcommittee on taxation. “[EU Economy Commissioner] Paolo Gentiloni needs to maintain the ambition of the reform,” he said, adding “that is the formulary apportionment.”
All proposals in the field of taxation require unanimous backing of EU countries, and multiple attempts to adopt common tax rules were frustrated by vetoes.
Since then, however, all 27 EU countries signed up to a global tax deal including a minimum corporate tax rate of 15 percent and the partial reallocation of profits of the world’s richest companies across jurisdictions. That’s why the Commission thinks that it has a shot of reaching consensus this time around.
“Something has changed,” the EU official said.
But businesses criticized the Commission’s timing just as corporates brace for the global corporate tax rate which will start to apply from next year.
“We need to understand the compatibility of these proposed rules with the EU’s global tax commitments,” said Mariella Caruana, BusinessEurope’s tax policy lead.
“What is the rush to propose a new tax framework? It may end up in more complexities and it does not promise a more stable and attractive environment,” she added.
The proposal, known as BEFIT, is set to be unveiled on Tuesday together with new rules on “transfer pricing” whereby multinational companies book their profits and costs across countries to minimize their tax bill, also obtained by POLITICO, and proposals requiring EU countries to collect tax on behalf of each other so as to allow small businesses to only interact with their home administration in their own language.
Thierry Breton is winning the war of ideas in Brussels.
The ex-CEO is a political whirlwind with a gigantic portfolio as internal market chief, the backing of French President Emmanuel Macron and lots of proposals. He’s been touring European Union capitals to win support for plans to shield Europe’s industry from crippling energy prices, American subsidies and “naive” EU free traders.
France’s decades-long push for more state intervention is finally findingsome echo in Berlin and the 13th floor of the Berlaymont building, occupied by European Commission President Ursula von der Leyen, who largely owes her job to Macron.
Omnipresent and ebullient, Breton is playing a key role in marshaling industry and political support for sweeping but so far vague plans to boost clean tech, secure key raw materials and overhaul EU checks on government support that he blasts as too slow to help companies.
“Of course there is resistance; my job is precisely to manage and align everyone,” he told French TV this week of his January meetings with Spanish, Polish and Belgian leaders to flog a forthcoming industrial policy push that could be a turning point in how far European governments will finance companies.
Time is short. Von der Leyen wants to line up proposals for a February summit. European industry is complaining that it can’t swallow far higher energy prices and tighter regulation for much longer, with at least one announcing a European shutdown and an Asian expansion.
Breton said governments don’t need convincing on the need for rapid action. But he’s running up against one of Europe’s sacred cows — EU state aid rules run by Executive Vice President Margrethe Vestager that curb government support with lengthy checks to make sure companies don’t get unfair help. She’s also under intense pressure to preserve a “level playing field” as smaller countries worry about German and French financial firepower.
The French internal market commissioner’s bullish style often sees him act as if he’s got a role in subsidies. In the fall, he sent a letter to EU countries asking them to send views on emergency state aid rules to the internal market department, which is under his supervision, two EU officials recalled.
In a meeting with European diplomats, a Commission representative had to correct it, the EU officials said, asking capitals to make sure the input goes instead to the competition department overseen by Vestager.
Europe First
While Breton doesn’t like to be called a protectionist, his latest mission has been to protect Europe from its transatlantic friend.
As early as September, one Commission official said, the Frenchman was mandated by Europe’s industry to speak out against U.S. President Joe Biden’s Inflation Reduction Act, which provides tax credits for U.S.-made electric cars and support to American battery supply chains.
U.S President Joe Biden gives remarks during an event celebrating the passage of the Inflation Reduction Act on September 13, 2022 | Anna Moneymaker/Getty Images
His Paris-backed campaign charged ahead while EU officials and diplomats tiptoed around the subject. Some within the Commission headquarters found his bad cop routine helpful in keeping pressure on the U.S.
“He’s been constructive, though clearly disruptive,” said Tyson Barker, head of the technology and global affairs program at the German Council of Foreign Relations.
The Frenchmanhas even pitched himself as the bloc’s “sheriff” against Silicon Valleygiants, warning billionaire Elon Musk that an overhaul of the Twitter social network can only go so far since “in Europe, the bird will fly by our rules.”
“Big Tech companies only understand balances of power,” said Cédric O, a former French digital minister who worked with Breton during the French EU Council presidency. “When [Breton and Musk] see each other, it necessarily remains cordial, but Breton shows his teeth and rightly so. It’s his job.”
Breton can even surprise his own services, according to two EU officials. In May, the Commission’s department responsible for digital policy — DG CONNECT — was caught off guard when Breton announced in the press that he would unveil plans by year-end to make sure that technology giants forked out for telecoms networks.
In so doing, Breton — who was CEO of France Télécom in the early 2000s — resurrected a long-dormant and fractious policy debate that had been put to rest almost a decade ago, when erstwhile Digital Commissioner Neelie Kroes ordered Europe’s telecoms operators to “adapt or die” rather than seek money from content providers.
After Breton’s commitments, the Commission’s services were soon scrambling to develop some sort of a coherent policy program to deliver on the Frenchman’s comments. A consultation is scheduled for early this year.
Carte blanche
Breton is a rare creature in the halls of the Berlaymont, where policy is hatched slowly after extensive consultation. To a former CEO with a broad remit — his portfolio runs from the expanse of space to the tiniest of microchips — rapid reaction matters more than treading on toes or singing from the hymn sheet. This often sees him floating ideas and then pulling back.
Last year he alarmed environmentalists by raising the prospect of a U-turn on the EU’s polluting car ban. He wagged his finger at German Chancellor Olaf Scholz for a solo trip to China. He called for nuclear energy to be considered green. He has pushed out grand projects — such as industrial alliances on batteries and cloud, or a cyber shield — that he doesn’t always follow up on.
He’s even pushed forward a multibillion-euro EU communication satellite program dubbed Iris², a favorite of French aerospace companies, that will see the bloc build a rival to Musk’s space-based Starlink broadband constellation.
“It’s clear that he’s been given more free rein than others,” said one EU official. “He has von der Leyen’s ear,” the official added, noting that Breton enjoys “privileged access” to the Commission president — who may be mindful that she’ll need French support for a second term.
According to an official, Breton “has von der Leyen’s ear” and enjoys “privileged access” to the Commission president | Valeria Mongeli/AFP via Getty Images
Indeed, Breton’s massive role was partly designed as a counterweight to a German president.
“There is a criticism of von der Leyen for being too German,” explained Sébastien Maillard, director of the Jacques Delors Institute think tank. “There may inevitably be a division of roles between them — [where Breton is] a counterbalance.”
He’s been called an “unguided missile,” but more often than not, the Frenchman has Paris’ backing when going off script. His October op-ed with Italian colleague Paolo Gentiloni, which called for greater European financial solidarity, was part of France’s agenda, according to one high-ranking Commission official.
“When he went out in the press with Gentiloni against Scholz’s €200 billion, he was clearly doing the job for Macron,” the official said.
His November call for a rethink on the 2035 car engine ban came just after a week after critical green legislation had been finalized by Commission Executive Vice President Frans Timmermans and jarred with the EU’s own position at the COP 27 climate summit in Indonesia. But it aped the position of French auto industry captains, such as Stellantis CEO Carlos Tavares and Renault’s Luca de Meo, who wanted Brussels to slam the brakes on the climate drive.
Breton had not coordinated his car comments with colleagues in advance, according to two Commission officials.
Less than 10 days later, French Prime Minister Elisabeth Borne echoed caution about the “extremely ambitious” engine ban and warned that pivoting to electric car manufacturing was daunting.
Going A-list
Breton acknowledged himself that he wasn’t Macron’s first choice for the critical EU post, telling POLITICO at a live event that he was a “plan B commissioner.”
Asked if he was targeting an A-list job for the new Commission mandate in 2024, he said he “may be able to consider a new plan B assignment — if it is a plan B.”
“He is thinking about the future,” said one EU official. “Look at his LinkedIn posts. He is thinking past the next European elections. He definitely wants to convince Macron to get an expanded portfolio.”
Grabbing the Commission’s top job may be tricky, relying on how EU leaders will line up, according to multiple EU and French officials.
There are other jobs, including overturning the unwritten law that no French or German candidate can hold the economically powerful competition portfolio. Another option could be becoming Europe’s official digital czar, combining the enforcement powers of the Digital Services Act and the Digital Markets Act into a supranational digital enforcement agency, one EU official said.
Breton has shrugged off speculation on his long-term plans.
“All my life, I have been informed of my next potential job 15 minutes before,” he said last month.
Jakob Hanke Vela, Stuart Lau, Barbara Moens, Camille Gijs and Mark Scott contributed reporting.
