BRUSSELS: Concerns are growing among France’s European Union partners and on financial markets that the fragility of its minority government could weaken efforts to shore up its public finances and so risk undermining the EU’s new fiscal rules. France unveiled a new government on Saturday, led by Prime Minister Michel Barnier, which will have to rely on the far-right National Rally in key votes like the 2025 budget or the seven-year debt reduction plan required by EU rules. Both the far-right and the far-left - each with around one third of the seats in parliament - oppose spending cuts, even as France’s budget deficit is set to rise to around 6 percent of GDP this year, twice the EU limit.

“The political fragility of the coalition is clear,” said one eurozone official, who like others interviewed for this story requested anonymity because of the political sensitivities involved. “I would not say that expectations are overly optimistic.” The European Commission reckons France’s public debt, at 110.6 percent of GDP in 2023, will rise to 112.4 percent this year and 113.8 percent in 2025 unless action is taken. EU rules require a fall of 1 percent point of GDP a year.

”This is a real dilemma, obviously. Putting together a debt-cutting plan that is both compliant with the new framework and politically acceptable in the hostile French parliament is going to be extraordinarily difficult,” a second euro official said. ”In the end, one needs to hope that there is sufficient realization in Paris that the cost of failure could be very high, and that will encourage some parties to at least temporarily lend their support to the government,” he said.

Market concern about French public finances is pushing the country’s borrowing costs higher. The yield on France’s 10-year bonds briefly rose above Spain’s on Tuesday for the first time since the 2008 financial crisis.

Barnier plans to present the 2025 budget to the French parliament and the European Commission by mid-October. A 7-year plan of reforms, investments and debt reduction is expected a couple of weeks later, by end-October. While EU officials believe market pressure could put pressure on French politicians to make tough decisions, they fear a weak plan would undermine the credibility of the new EU fiscal framework that came into force in April.

“I don’t expect that this time France will easily get away, this would be a major blow for the new rules,” a third senior eurozone official said. France has in the past enjoyed special treatment from the EU executive when it comes to compliance with EU fiscal rules. The country has long fallen foul of EU rules requiring member states to keep budget deficits to less 3 percent of economic output, and Paris has not booked a surplus since 1974, three years before President Emmanuel Macron was born. Former Commission head Jean-Claude Juncker once explained that the country got special treatment because “France is France.” — Reuters

The new rules - while allowing countries to negotiate their own debt reduction paths with the European Commission - are meant to show markets that EU governments are serious about reducing debt after the pandemic and the energy crisis.”I guess the French plan will be a test case,” a fourth euro zone official said. “We’ll see how much creativity there will be,” he added, noting that even if the initial plan looks tough on submission, Paris could be granted leeway later, when the Commission checks its implementation over the years. — Reuters