France, Germany chided on ballooning budget deficits

  • 2003-01-23
  • Jitendra Joshi

The European Union clamped down Jan. 21 on bulging national deficits that risk undermining the euro, but France has insisted on the right to galvanize growth rather than tighten its belt.

EU finance ministers adopted an "excessive deficit procedure" against Germany and urged the bloc's biggest economy to get its finances in shape as soon as possible, while approving an "early warning" against France.

The ministers upheld the European Commission's recommendation that Germany's budget deficit had grown to alarming levels and said far-reaching reforms were needed.

The German public deficit shot up to 3.75 percent of gross domestic product in 2002, well above the 3 percent ceiling laid down in the Stability and Growth Pact, the document binding the euro zone.

The ministers, including German Finance Minister Hans Eichel, agreed that Germany could breach the limit again in 2003.

They said "the German government should put an end to the excessive deficit situation as rapidly as possible."

The EU's economic powerhouse has been suffering an extended slump caused by a low potential level of growth.

"It is in the hands of the German government to raise it significantly through coherent reforms, notably of the labor market," the finance ministers said in a statement.

The excessive deficit procedure, which in theory could result in huge fines, was first launched against Portugal last year. But it is all the more embarrassing for Germany, which was the architect of the landmark 1997 stability pact.

German Finance Minister Hans Eichel has pledged to abide by the recommendations and trim his government's deficit and debt levels.

His French counterpart Francis Mer, however, refused to toe the EU line.

The EU ministers issued France with the "early warning" over its own bulging deficit, which Paris expects to stand at 2.6 percent of GDP this year, down from a projected 2.8 percent last year.

But Mer abstained from an EU decision that recommended France balance its books by 2006 and that it cut its public deficit by at least 0.5 percentage points of GDP a year until then.

Mer told a news conference he still backed the stability pact, with provisions. He said he was an "ardent supporter of the stability pact on condition that we do not forget the reasons for it, which are growth, support for growth and a reduction of debt."

The European Commission has warned that France is still at "large" risk of breaching the euro-zone deficit limit of 3 percent this year, despite the more upbeat projections by Paris.

EU sources said France was unhappy about the 2006 deadline, and the requirement to cut its deficit by 0.5 percentage points of GDP per year.

The 0.5 percentage point requirement was agreed by the other 11 euro countries at a meeting in Luxembourg in October, with France standing in lone opposition.

Economic and Monetary Affairs Commissioner Pedro Solbes urged France to redress its finances, warning that the common currency project was at "serious threat" from rising deficits.

Solbes insisted the commission had a mandate to recommend warnings against recalcitrant EU economies.

"But as you know, France has a special situation as a consequence of the decision they adopted in Luxembourg," he said.