Volkswacht Bodensee - France says needs 25 bn euros budget cuts to keep deficit promise

President Emmanuel Macron's government, which lost its parliamentary majority in Sunday's snap election, has come under intense scrutiny by the EU Commission over its deficit and debt levels.

Finance Minister Bruno Le Maire told reporters that this year's total projected cuts, worth $27.1 billion, were needed for France to lower its deficit to the government's 5.1 percent of gross domestic product (GDP) target this year, revised from an earlier 4.4 percent.

France's deficit last year, at 5.5 percent of GDP, was worse than forecast because of weaker tax receipts.

Like all eurozone members, France is supposed to keep its deficit to below three percent of GDP.

However that requirement, agreed between European Union members as part of their Stability and Growth Pact, was suspended in 2020 to allow countries to deal with the Covid pandemic, and then with the economic fallout of Russia's invasion of Ukraine.

EU members have since agreed to return to a trajectory that will bring deficits back into line over the coming years.

The European Commission last month admonished France, which has accumulated debt of over 110 percent of GDP -- close to double the EU-authorised percentage -- for the state of its finances.

On paper, EU members can be fined by the Commission for excessive deficits, but this has never happened.

No single force won Sunday's second-round vote outright, though a broad alliance of Socialists, Communists, Greens and the hard-left France Unbowed (LFI) collected the most seats, with 193 in the 577-strong National Assembly.

The coalition, called the New Popular Front (NFP), has demanded to be tasked with forming the new government, but Macron has been pushing for both the LFI or the far-right National Rally (RN) to be excluded from any broad government coalition.

The economic plans of the NFP -- which include a reversal of Macron's pension reform and an increase in the legal minimum wage -- would increase budget deficits even further, according to several economists.

The prospect of such policies being implemented has weighed on France's creditworthiness, with buyers of French government bonds demanding a risk premium of around 65 basis points on French debt over benchmark Germany.

This means France now has to pay investors a higher return than Portugal, but still less than Spain.

Ratings agency Standard and Poor's had already in early June cut France's sovereign debt rating to "AA-" from "AA" over concerns of lower-than-expected growth.

Le Maire has promised that the French deficit will be below three percent by 2027.

T.Zimmermann--VB