France's deficit overshoots euro pact

The European Commission on March 6 set in motion an "excessive deficit procedure" against France for letting its budget deficit shoot over a ceiling set out in the euro zone's stability pact.

France became the third of the 12 euro group countries, after Germany and Portugal, to incur the wrath of the European Union's executive arm for allowing its deficit to exceed the pact's limit of 3 percent of gross domestic product.

France, which signaled it would have overshoot the limit this year and last year, now has until 2004 to rectify its finances or face the prospect of multimillion-euro fines.

Blaming an economic slowdown, the French Finance Ministry said the deficit would reach 3.4 percent of GDP in 2003.

But it said the deficit would fall below 3 percent in 2004, giving it grounds for arguing it should escape the punishment foreseen by the pact - an agreement pushed through by Germany in 1997 in a bid to enforce discipline on its freer-spending partners.

Ironically, Germany's deficit has also gone beyond the 3 percent ceiling along with Portugal's. But while both of those countries are taking remedial action, France appears unrepentant.

"The deficit at this level is excessive in relation to the pact, but it is not excessive in relation to the current economic scenario," French Finance Minister Francis Mer said after talks among the euro-zone ministers in Brussels.

The procedure, which entails a set of recommendations by Brussels directed at the miscreant economy, was triggered after France acknowledged its public deficit came to 3.04 percent in 2002.

The EU's statistics branch, Eurostat, is double-checking the French figures and could well issue a bigger deficit figure for last year when it releases its own appraisal on March 17.

French Prime Minister Jean-Pierre Raffarin said this week that he did not intend "to let deficits rise" but stressed that he would not oversee an economic austerity policy.

He said, "We need to save money in the state administration so that our bureaucracy is lighter... but austerity efforts should not fall on the backs of the French."

The Finance Ministry said last week that taxes would not increase this year, but that 1.4 billion euros in frozen credits would be canceled.

France had decided not to increase taxes "in order not to compromise (the chances of) an economic rebound happening as quickly as possible," the ministry said in a statement.

Several of France's partners in the euro bloc signaled their anger at such a stance, after battling hard to trim their own finances in line with the pact.

Finnish Finance Minister Sauli Niinistoe wrote in the business daily Talous Sanomat on March 6: "The 3 percent deficit limit in the Stability and Growth Pact must be respected absolutely."

Large deficits damage confidence for everyone in the common currency and even though "it will take some time before the punishment sets in, sooner or later it will be there," he warned.

Belgian Finance Minister Didier Reynders said of France: "There's no reason for different treatment."

The monthly euro-group talks came ahead of a full meeting of finance ministers from all 15 EU members on March 7. Britain, Denmark and Sweden are outside the euro zone.

The talks were likely to see the EU water down proposals tabled by the European Commission in November to fine-tune implementation of the stability pact amid the current slowdown.

The finance ministers would agree on the need for "a pragmatic approach" to the rules, according to a copy of the paper seen by AFP.

In a victory for France, no date is mentioned for budgets to return to balance.