9 October 2002, 08:53  France Resists EU Pressure for Annual Cuts in Deficit

/www.bloomberg.com/ By James G. Neuger
Luxembourg, (Bloomberg) -- France resisted European Union pressure to make annual cuts to its budget deficit, provoking protests by smaller European countries that have balanced their books.
French Finance Minister Francis Mer refused to promise to reduce the deficit by 0.5 percent of gross domestic product in 2003, saying France's progress in paring its budget gap depends on how fast the economy grows.
``What do you want to have -- growth or to reduce the deficit?'' Mer said after a meeting of European finance ministers. ``I would like to have higher growth than Germany, rather than to have a smaller deficit.''
With European growth slipping below 1 percent in 2002, the weakest pace since the 1993 recession, the clash between France and the other 11 countries using the euro heightened tensions over how to get the economy back into gear.
France's central government deficit widened 26 percent to 47.8 billion euros ($46.9 billion) in the first eight months, a report today showed. The deficit, which excludes social security and local government finances, reflected higher spending and falling revenue as the economy slowed.
Mer said he is choosing not to reduce next year's deficit to so he can increase spending on defense. European Monetary Affairs Commissioner Pedro Solbes said this isn't an excuse.
Cuts Needed
The French ``have to find how to finance this, either through additional income or by reducing expenditure,'' he said in an interview. ``We consider that fiscal stability is a crucial element for the rate of growth in the medium to long term.''
Not cutting the deficit ``might increase growth in the short term but it will create problems after,'' Solbes said.
Irish Finance Minister Charlie McCreevy said special treatment for defense spending could lead to other exemptions.
``If you leave out defense spending, why not infrastructure spending?'' he said. ``How that would be resolved I don't know.''
Mer's refusal to participate in deficit reduction next year will make it harder for other finance ministers to justify stringent budgetary measures before the economy gains speed, he said.
Mer said U.K. Chancellor Gordon Brown supported his postponement of deficit reduction. ``Gordon defended my position,'' Mer said in an interview. Brown declined to comment.
France is also at odds with European Central Bank President Wim Duisenberg's insistence on annual cuts in the deficit by countries that take advantage of a European Commission proposal to delay balanced budgets by two years to 2006.
`Disappointing' Results
Duisenberg said governments that failed to cut their deficits when the economy was accelerating in the late 1990s are now being ``punished.''
``The results of fiscal policy in several countries have been very disappointing in the last few years,'' Duisenberg told the European Parliament's economic and monetary committee in Brussels. ``The pace of reform has significantly fallen.''
ECB policy makers will probably leave the main interest rate at 3.25 percent on Thursday, analysts said.
Executives joined in the chorus of disapproval. ``Do what you have promised,'' said Niall FitzGerald, chairman of Unilever, said in a speech to the European Policy Center in London. ``European industry needs a growth-oriented and predictable business environment.''
The commission recommended easing the budget-balancing deadline last month to give Europe's big economies more scope to lower taxes and increase spending to combat the slowdown and increase in unemployment to close to a two-year high.
Leeway
France had already taken advantage of the leeway, announcing last month that it would post an unchanged deficit of 2.6 percent of GDP in 2003 and saying it might miss even the new balanced- budget timetable.
Germany, Europe's largest economy, plans to cut spending and scrap tax breaks to fight the deficit in 2003. Portugal -- the only country so far to top the deficit limit of 3 percent -- and Italy are also making progress, the commission said.
The proposed extension was a source of conflict at the ministers' meeting, with countries such as the Netherlands, Finland and Spain opposing a formal agreement on the looser timeframe.
The goal of 2004 ``remains the basis of our reference,'' said the meeting's chairman, Nikos Christodoulakis of Greece. Still, he said, unexpectedly weak growth could throw that timetable off track.
Eight Countries
Eight countries -- Belgium, Greece, Spain, Ireland, Luxembourg, the Netherlands, Austria and Finland -- will be in surplus or post deficits below 0.2 percent in 2002, the commission forecasts. Together, the eight make up 29 percent of the economy - - about the size of Germany alone.
France's refusal to cut its deficit in 2003 ``is clearly not in line with the spirit of the stability pact,'' Dutch Finance Minister Hans Hoogervorst said. ``It's regrettable. I'm not pleased with the situation we are in.''
The German-designed stability pact sets limits on government borrowing to prop up confidence in the euro. Widening deficits haven't hurt the euro so far. The currency has risen 14 percent against the U.S. dollar since Jan. 30, when the commission first reprimanded Germany and Portugal for failing to plug budget holes.
Luxembourg Prime and Finance Minister Jean-Claude Juncker, a supporter of the two-year extension, said France shouldn't be allowed to further bend the rules.
``I've read in the French papers that 2006 for them means 2007,'' Juncker said. ``For me, 2006 means 2006.''
The commission said it isn't gutting the rules. It left untouched the pact's cornerstone, the upper limit on deficits of 3 percent of GDP.
Governments that exceed the limit, like Portugal last year, risk fines as high as 0.5 percent of GDP, though only after a vote of finance ministers. Germany and France may join Portugal in breaching the limit this year, the commission said last month.

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