Brussels faces French wrath over budget cuts (Roundup)

Nov 10, 2009, 13:36 GMT

   Brussels - France on Tuesday resisted European Commission demands that the country return to fiscal rectitude by 2013, with French officials insisting on a one-year extension to the deadline.

The EU executive in Brussels planned to issue new guidelines Wednesday calling on both France and Germany to reduce their budget deficits to within 3 per cent of gross domestic product (GDP), as prescribed by the bloc's Stability and Growth Pact, by 2013.

   But while German Finance Minister Wolfgang Schaeuble, at a meeting of EU finance ministers in Brussels, said that 2013 was 'exactly what we want,' France expressed irritation. French Budget Minister Eric Woerth said meeting such a deadline would be 'very difficult'.

Germany, a traditionally virtuous country from the fiscal point of view, is expected to post a budget deficit of 3.4 per cent of GDP this year. France, however, is sitting on a deficit of more than 8 per cent of GDP.

Joaquin Almunia, the European Union's commissioner for economic and monetary affairs, insisted Tuesday that the deadlines would be objective and would take into account a series of factors, including a country's public debt level and its fiscal reputation.

While all member states should be treated fairly, 'they should be treated differently, because they are not in the same position regarding the size of their deficits, their degree of indebtedness,' and their 'situation vis-a-vis the markets,' Almunia said.

One of the explanations for imposing a tough deadline on France comes from the financial markets.

While Germany offers an interest rate of just 3.25 per cent on its 10-year government bonds, France needs to sell its own 10-year bonds at a higher interest rate, currently set at 3.54 per cent. The spread highlights investors' lower confidence in the state of France's public accounts.

   Despite the pressure being applied by Almunia, French Prime Minister Francois Fillon is believed to be sticking to his line that the deficit should be reduced to the GDP limit of 3 per cent by 2014, rather than a year earlier.

   Latest figures show a majority of EU countries exceeding the pact's 3-per cent-limit, largely as as a result of higher government spending aimed at mitigating the impact of the recession.

But the commissioner is expected to be particularly tough on Greece, in effect proposing to place the country's budget under Brussels' tight control. Greece's budget deficit is expected to exceed 12 per cent of GDP this year.

   EU officials have repeatedly expressed dismay at Greece's tendency to produce unreliable economic estimates, and Almunia confirmed Tuesday that the previous Greek government had failed to stick to its fiscal obligations, as had been requested by Brussels.

The commission was also expected to impose an austerity regime on Ireland by asking it to cut its structural deficit by 2 per cent each year. The commission usually refers to annual structural cuts of about 0.5 per cent. Ireland, which is bracing itself for a 2014 deadline, faces a jaw-dropping deficit of around 15 per cent of GDP.

   Italian Finance Minister Giulio Tremonti, meanwhile, said Italy's 2012 deadline was in line with the government's own plans.

The commission is eager to reassure financial markets that it has the bloc's public finances under control, hence the need to spell out fiscal 'exit strategies' and deficit 'roadmaps' following the worst recessions in decades.

There was more tension in Brussels on Tuesday when Swedish Finance Minister Anders Borg urged his EU colleagues to be as 'pragmatic and cooperative as possible' when discussing an overhaul of the EU's financial supervision architecture.

'If we do not reach a decision in December, it will mean that we will not have drawn the right lessons from the (financial) crisis,' said Borg, who was chairing the meeting as the current holder of the EU presidency.

Britain, home to the EU's biggest financial centre, the City of London, remains concerned that the reform could allow Brussels to force London to use British taxpayers' money to bail out large, multinational banks.