France warns it may run foul of EU budget rules as it funds new security measures

France was openly defiant against the European Union after it emerged that it was unlikely to meet its commitments under the euro zone's common currency spending limits. Paris, which only last week came under terror attacks, has declared itself at war and that security spending took priority.

France is already under an EU disciplinary process called the excessive deficit procedure for having a budget gap higher than the 3% of GDP, under the stability and growth pact. EU finance ministers set annual fiscal consolidation targets for countries under this procedure.

Paris submitted its figures to the EU before the Paris terror attacks on Friday (13 November). Things may now change drastically as France hikes its defence and security budget to counter the terrorist threat both at home and in the Middle East.

Speaking to French lawmakers, President Francois Hollande said: "The security pact takes precedence over the stability pact. France is at war." Friday's terror attacks claimed the lives of 129 people and wounded more than 350.

Separately, French Prime Minister Manuel Valls told the French public radio that Brussels must break from its past insistence that military and security spending should be considered equal to other spends. He insisted that the French government will not cut spending from elsewhere to fund its new defence measures that will be put in place following the terror attacks.

France has already launched a flurry of air strikes in Raqqa in retaliation for the Paris attacks and its Foreign Minister Laurent Fabius has warned: "We cannot let [Isis} act without reacting. It is planning to despatch its aircraft carrier the Charles de Gaulle to the Persian Gulf, effectively doubling France's military presence in the Middle East. The carrier carries 12 Rafale and nine Super Etendard fighters, which will add to the nine Rafales in the United Arab Emirates and the six Mirage fighters in Jordan.

"Europe must understand, and it is time the European Commission understands too, that this is a fight that concerns France, but that concerns Europe too," Valls said. He warned: "France's [deficit] commitments will be inevitably overshot. Europe must understand."

The European Commission has already said that while France will meet its budget deficit target next year at 3.4% of GDP, it will not fall below the 3% target in 2017 as agreed by Paris last year. The commission believes that its deficit will hit 3.3% in 2017.

It also said that France will only meet its 2016 targets because of unexpectedly good growth figures rather than enacting the kind of economic liberalisation reforms it had promised. It said Paris's liberalisation efforts "fall significantly short of the recommended level".

It has asked France to go back to the drawing table and return with additional measures "to ensure that the 2016 budget will be compliant." If the pre-Paris terror attacks figures submitted to the commission did not meet Brussels' expectations, there are strong doubts the current situation will improve significantly.

The commission has been a bit conciliatory towards Paris, with Pierre Moscovici, the former French finance minister who is now the EU Economic and Monetary Affairs Commissioner, said that the evaluation made by Brussels was prior to the Friday terrorist attacks. He said the commission would be open to new spending that France believes is necessary to counter its terrorist threat.

"We will of course take into account the tragic situation faced by the country and we will evaluate the impact in due course," Moscovici said in a news conference announcing the results of the annual EU-wide budget review. "The [budget pact] is often accused of rigidity, or even stupidity. But I think we've shown by our flexible stance it is neither rigid nor stupid."

He added: "We will re-evaluate all possible budgetary expenses of these new developments. It is too early to say how they will impact France's budgetary trajectory."

The EU budget rules does allow for temporary deviations in cases of unexpected national emergencies. The Financial Times noted that several countries, including Italy had requested such flexibility to deal with the influx of migrants from the Middle East and Africa.

However, the FT highlighted that France has been one of the longest budget offenders in the euro zone, with its budget deficit only coming under the 3% target twice since 2002. France has already had its deadline to achieve the below 3% limit extended twice in the past three years, it noted.

Mujtaba Rahman, the head of European analysis at the Eurasia Group risk consultancy said: "France is on a war footing and pushing for more fiscal flexibility to advance that. Brussels and Berlin will need to be sensitive given the context, but they're unlikely to agree given France's numbers remain a cause for concern."

Four other countries risk breaking deficit rule

The report also noted that Italy, Lithuania, Austria and Spain risked breaking the fiscal rules, based on their 2016 budget submissions. "The draft budgetary plans of these countries might result in a significant deviation from the adjustment paths towards the medium-term objective," the report said.

To be in line with the pact, countries have to reduce their structural deficit by at least 0.5% of GDP each year until they are close to balancing the deficit or are in surplus. Similarly, the commission has said that the budget costs of the migrant crisis will be treated as an exceptional circumstance and not counted towards the deficit calculations.

Germany, Italy, Austria, Finland and Belgium have included estimates of the financial impact of the refugee crisis in their draft budgets for 2016. Valdis Dombrovskis, the vice president of the EU executive said the commission is willing to use the provision for unusual events outside the government's control.

"On the basis of further data provided by authorities we will come back to this in spring when we will assess again the budget situation in 2015 and 2016," he said. Overall, the aggregate euro zone budget deficit is projected to shrink to 1.7% of GDP in 2016 from 1.9% this year. Debt is also expected to dip slightly to just below 90% of GDP.