The future of the Growth and Stability Pact has been cast further into doubt after France yesterday went ahead with a controversial 3pc cut in income tax. The move, in direct defiance of France's partners in the eurozone, means it is now almost certain to breach the EU's budget deficit rules in 2004 for a third consecutive year. Finland led demands from other single currency members for the European Commission to apply the Stability Pact firmly, which could see Brussels proposing tough fines on Paris. Meanwhile, Lucas Papademos, ECB vice-president, said the bank's governing council noted with "great concern" the recent fiscal developments in the eurozone, and warned they could make rate cuts less likely.
However, French president Jacques Chirac won some support from German Chancellor Gerhard Schroeder - who is in a similar economic position and faces breaching the deficit ceiling of 3pc of GDP again next year. Chirac's fulfilment of his promise to cut tax by 30pc over five years - despite a 4pc deficit this year - sets the scene for an explosive meeting of EU finance ministers in Italy next week. //www.fxcentre.com