France’s next government will need to find more than €15 billion in extra revenue or savings a year to meet European Union (EU) demands, according to people with knowledge of the assessment.

That total was included in a proposal that the European Commission sent to Paris last month, said the people, who declined to be identified because discussions on the matter are confidential. The adjustment equates to around 0.55% of annual gross domestic product (GDP) over seven years.

The opening gambit from Brussels will form the basis of tough negotiations with a prospective French government that has yet to be formed. The country was one of several EU members rebuked in June for breaching the bloc’s fiscal rules, and is now subject to a monitoring regime that could lead to potential sanctions.

Agreeing any spending cuts in France will be a tall order after President Emmanuel Macron’s snap elections. A left-wing alliance won the vote but didn’t clinch a majority of lawmakers, and the result is a hung parliament riven by divisions on budget policy.

The outgoing government in Paris had committed to emergency measures to pare spending this year, but parties in position to form the next one have pledged huge increases. Even the hastily assembled manifesto of Macron’s own group would add around €21 billion a year to the deficit, according to analysis from think tank Institut Montaigne.

Given the debt burden and scrutiny from Brussels, Bank of France Governor François Villeroy de Galhau warned on Thursday that the country mustn’t increase its budget shortfalls.

“We can’t dig deeper deficits,” he told Franceinfo radio. “They cost more and more to finance, and weigh on our sovereignty.”

The €15 billion tally is part of negotiations for France to get more time to get below the bloc’s deficit ceiling of 3% of output, prolonging the permitted horizon from four years to seven years, the people said. France’s gridlock is complicating discussions on reforms and investments that would accompany that longer outlook, the people said.

Measures that could reduce spending include a reform of the unemployment insurance system that was due to be implemented. However, on the night of the first round of the legislative elections, the prime minister suspended the implementation of the changes.

Without an extension of the time horizon, the country would have to pare back plans more drastically. The adjustment needed should be 0.94% of GDP in a four-year scenario, and 0.54% over seven years, according to estimates by Bruegel, a Brussels think-tank.

PIMCO Europe Sovereign Credit Analyst Nicola Mai told Bloomberg Television on Wednesday that he reckoned any administration that gets formed in Paris will ultimately play ball.

“We’re going to have a weak government - a minority government,” he said. “Whoever is in government is probably going to broadly meet the commission’s demands when it comes to the deficits.”

The recommendations to countries made last month are intended to guide them as they prepare to send medium-term fiscal plans to Brussels by Sept 20 under the EU’s newly revamped fiscal rules.

Those plans then get scrutinised by officials and the bloc’s finance ministers, serving as a basis for annual budgets that countries must then submit by mid-October.

A member state and the commission may agree to extend the September submission deadline by a reasonable period, a commission spokesperson said. But failing to deliver on that would prompt the bloc’s finance ministers, on a proposal from the commission, to recommend that the submission sent by Brussels in June should fully apply, the spokesperson added.

For bond investors, France’s fiscal trajectory is crucial at a time when its debt already exceeds 110% of GDP and keeps rising.

The extra yield investors demand to buy French bonds compared to safer German equivalents has already shot up as the market balks at that prospect. The spread is now hovering at 65 basis points, well above an average of around 40 basis points over the past five years.

While financial markets have granted France a “summer lull”, pressure from investors may mount before scheduled reports by ratings companies later this year, Barclays Bank Head of Economics Research Christian Keller told Bloomberg TV.

“France needs to do something, and they need to do the opposite of what most of the parties seem to be suggesting right now,” he said. “Over time there will be pressure on French spreads, further from where we are now.”

  - Bloomberg