EU prepares to reject France’s 2015 budget, setting up clash over deficit

BRUSSELS—The European Union is preparing to reject France’s 2015 budget, according to European officials, setting up a clash that would be the biggest test yet of new powers for Brussels that were designed to prevent a repeat of the eurozone’s sovereign-debt crisis.

French Finance Minister Michel Sapin said last month that his country would run a budget deficit of 4.3% of gross domestic product next year—far from the 3% deficit it had previously promised. Stripping out the effects of the weak economy, the government’s planned cost cuts would amount to just 0.2% of GDP, falling short of cuts worth 0.8% that it agreed upon with Brussels.

That could put France’s budget in “serious noncompliance” with the new EU rules, likely leading the commission to send it back to Paris for revisions, European officials said. So far, the French government has said it won’t take any extra measures beyond what it proposed in the spring, indicating it is ready to risk a public clash with Brussels.

“People are ready to let the big boys in Brussels reject the budget,” a European official said.

The conflict with France could be joined by a budget fight with Italy, which has also said that it will miss agreed budget targets. Italy has more leeway because its past budgets have run lower deficits than France’s, but a senior EU official called a decision about whether to confront Italy “borderline.”

The credibility of Brussels’ new powers threatens to be seriously undermined if big countries such as France and Italy are able to flout the new rules—which give the European Commission the right to demand changes to proposed budgets before they are presented to national parliaments. It would signal the tough budget regime can only be imposed on the eurozone’s smaller economies, such as Greece and Portugal.

Some European officials have drawn parallels with the way France and Germany ignored deficit limits a decade ago without consequences, a step that they believe fatally weakened budget discipline in the bloc.

“What people underestimate is that what’s at stake is the entire credibility of the rules,” the first official said.

Paris and Rome argue that it makes no sense to cut budgets further in the face of their deteriorating economic outlooks. European policy makers are conscious that anti-EU sentiment in France is running high, and rejecting the budget could play into the hands of the far-right anti-EU National Front party of Marine Le Pen.

French President François Hollande ’s approval ratings are at a record low. Mr. Hollande is also under pressure from within his party, as around 30 Socialist lawmakers abstained from a confidence vote last month and some say they will vote against the budget if he doesn’t dial back on spending cuts.

The commission also plans to examine France’s deficit this year. The budget plans announced last week by the French government estimated that the 2014 structural deficit would fall by only 0.1% this year, compared with the EU target of a 0.8% cut.

France risks sanctions of as much as 0.2% of GDP.

The issue has been complicated by the imminent changeover at the Brussels-based commission. Former Luxembourg Prime Minister Jean-Claude Juncker is scheduled to take the reins of the EU’s executive arm from José Manuel Barroso at the end of the month, and its new makeup will include former French Finance Minister Pierre Moscovici as in charge of inspecting national spending plans.

Budgets must be submitted to the commission by Oct. 15, and a decision to send the budget back to Paris would be the last act of the Barroso commission, which meets on Oct. 29. Messrs. Juncker and Barroso are coordinating their approach, EU officials said.

Eurozone governments have missed budget targets throughout the crisis as the economic decline turned out worse than expected. In those cases, the commission gave countries, including France, the Netherlands and Spain, more time to cut spending. What makes France’s 2015 budget different, though, is that the budget overruns are apparent already now.

“It’s not like they will try and fail; they’re actually planning not do it,” another EU official said.

Some staff within the commission still hope that a showdown with Paris can be avoided if the government announces fresh overhauls to its economy that could spur growth in the future.

Paris is looking at opening up its services sector and improving competition in the transport industry, for instance, by allowing long-distance bus services and competition on certain train routes, one official said. However, these may fail to satisfy Brussels and Germany, which are pushing for changes to France’s 35-hour workweek and labor contracts, he added.

A spokesman for the German government declined to comment on potential actions by the commission. Chancellor Angela Merkel has said that “Germany will support the commission and will not make its own judgment” on France’s deficit.

An official at the French finance ministry declined to comment but referred to comments the finance minister made on the deficit and EU rules earlier Sunday.

“We have entered a period that requires a change of the economic doctrine in Europe,” Mr. Michel Sapin told French radio station Europe 1.

“We aren’t asking for any change to the rules. We wanted these rules, and they are treaties we signed. These rules must apply in the same way to everyone: big countries as much as little countries.”