FRANKFURT, Oct 22 - Bundesbank's Vice President Juergen Stark said on Wednesday the EU Commission's decision to give France more time to cut its budget deficit will lead to higher long-term interest rates and could have consequences for monetary policy. Stark called the EU action a capitulation in face of French intransigence and said France is turning its back on its EU obligations to get its deficit below three percent next year. "The Commission's decision will lead to a rise in long-term interest rates on the financial markets. That counteracts France's intention to avoid destabilising the economy by taking on a higher deficit," Stark told in an interview. Stark said he saw no immediate threat to the ECB's goal of price stability from government failure to rein in budget deficits, but he added: "I don't exclude that there may be consequences for monetary policy in the medium and long term." The European Commission on Tuesday gave France the green light to break the EU's deficit limit for the third year running, saying it should be given until 2005 to bring its deficit below three percent of gross domestic product. In return, it wanted bigger cuts than planned in France's 2004 structural deficit, which is adjusted for economic swings, a demand that France has said it will not be able to meet. The commission has come under attack from the Netherlands and Austria for not being strict enough in doing its job of enforcing the budget discipline rules of the EU's Stability and Growth Pact. Stark echoed this criticism. "In the case of France, the Commission tried to save from the Stability Pact what there was to save. However, what the Commission decided is less than the required minimum. They should have demanded that France return under the three-percent deficit limit in 2004," he said.
"This was a capitulation in the face of French refusal to apply the necessary fiscal rules of the game that monetary union needs. France is contravening essential solidarity in that it is not applying European law and it is disregarding obligations that it has itself undertaken." It is crucial that Germany does not further undermine the credibility of the Stability Pact, he added. The European Central Bank declined to comment on France's budget situation, in line with its policy not to address individual countries, but has repeatedly urged the Commission to apply the budget rules strictly. The European Central Bank argues that budget discipline enforces market credibility and has implicitly warned it cannot properly fight inflation, which is its main task, if politicians do not live up to Europe's self-imposed budget rules.//