The European Fiscal Board took aim at how the Commission is enforcing the revamped budget rules for France and Italy. It argued Brussels should have scrutinized Rome's spending more, even though Italy's headline deficit narrowed last year. As the report puts it, "giving prominence to the decline in the headline deficit clashes with established practiced since the 2005 reform of the Stability and Growth Pact to shift attention from observed outcomes toward policy efforts." The Board also flagged "inaccurate language" used to describe how Italy's fiscal effort was monitored in 2023.
On France, the EFB criticized what it called an ambiguous reading of Paris's adherence to the fiscal path it agreed with EU partners. Relying on the annual expenditure growth rate as its yardstick, the Commission tagged France "at risk of non-compliance," even as the cumulative expenditure growth metric led it to judge the country "compliant." Such "ambiguity" could "reduce the predictability and transparency of the framework and make it more difficult for stakeholders to understand the basis on which compliance assessments are made," the report said.
The critique lands in a week when Italy might publish lower deficit figures, potentially opening the door to exit the EU's extra monitoring regime. It also follows the EU's decision to give capitals more flexibility this year to handle rising energy costs tied to the Middle East War.
France is navigating a recent credit rating downgrade, and its bond spread over German equivalents has widened to levels last seen in 2012 during the euro-area crisis. In November, the Commission is expected to indicate to Paris the amount of savings required next year to comply with the rules.
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Finance ministers are increasingly worried that the conflict in the Middle East could drive energy prices higher while global bond markets remain turbulent. Over the weekend, Eurogroup president Kyriakos Pierrakakis told euro-area finance ministers that he is not ruling out convening an emergency meeting in the coming weeks to discuss the issue.
If compliance calls look inconsistent while borrowing costs stay jumpy, countries like France and Italy could face tougher financing conditions and sharper budget adjustments. That backdrop can spill into sovereign bond funds and European equity exposure in regular portfolios. Keeping tabs on how Europe enforces its rules helps you spot where fiscal stress might flare next.
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