MNI: New Fiscal Rules Give Lecornu Budget Leeway- EU Officials

The European Union’s new more flexible fiscal rules should allow some scope for embattled French Prime Minister Sebastien Lecornu to achieve a compromise between political factions to secure support for a 2026 budget in the National Assembly, so long as this is in line with capping increases in net annual spending to 1.2% over the next three years, EU officials told MNI.

Any increase over that key benchmark would prompt Brussels to issue stern words in the European Semester autumn package, the officials said. The Commission said earlier on Wednesday that it is closely monitoring the French budget debate.

The recent rise in French bond spreads was a salutary warning to Paris to contain its borrowing, officials said at a recent meeting, expressing confidence in the resilience of the post-financial crisis architecture of the single currency bloc.

OMT, TPI

While officials conceded that if France did get into serious trouble the European institutions would have little choice but to go to its aid in order to defend the single currency, they added that mere existence of European Central Bank and European Stability Mechanism tools has been reassurance enough for bond investors, making it unlikely they will ever be needed to be deployed in practice. (See MNI INTERVIEW: ECB Should Not Ease French Bond Woes - Papadia)

The increased attractions of the euro and euro-denominated assets following U.S. reciprocal tariff announcements on April 1 have also provided a timely prop from international investors for French and other eurozone debt, they noted.  

The ECB has an array of emergency tools, including Outright Monetary Transactions and its Transmission Protection Instrument which could be deployed if efficient transmission of ECB monetary policy were endangered, though any country receiving such assistance would need the European Commission to vouch for its compliance with fiscal rules.

Countries facing temporary fiscal stress could also call on the euro area bailout fund's precautionary credit line.