EU says France may push European deficit over limit

France's widening budget deficit may push the overall shortfall for the dozen countries using the euro above European Union limits, narrowing the scope for interest-rate cuts, the EU said.
Tax cuts and the economic slowdown will boost France's deficit as high as four per cent of gross domestic product in 2003, overstepping the 3 per cent limit for the second year, the French government said yesterday.
"The impact is felt by the euro zone as a whole in terms of the budgetary and monetary policy mix," European Commission spokesman Gerassimos Thomas told a Brussels news conference. He accused France of failing to "intensify" budget cuts.
Europe's economy probably shrank in the second quarter for only the second time since the euro's birth in 1999. The European Central Bank has said interest rates at a half-century low of 2 per cent are enough to revive growth.
Central bankers are accusing governments of jeopardising the economic recovery and fuelling the risk of inflation by failing to keep their deficits in line with the budgetary "stability pact" designed by Germany to underpin the euro.
The 12-nation economy probably shrank 0.1 per cent in the second quarter instead of holding steady as originally estimated, an official at the EU statistics office said today. Revised figures will be published 9 September.
Tax cuts
French Prime Minister Jean-Pierre Raffarin last week defied calls to hasten fiscal cutbacks, urging the rest of Europe to join France in steps to boost growth and employment.
Like the US, France is putting priority on tax cuts to ignite an economic recovery. The U.S. deficit may reach USD455 billion, or 4.6 per cent of GDP, in the fiscal year ending 30 September, the Bush administration estimates.
France, an opponent of the budget constraints since before the euro's start, is under pressure from smaller countries such as the Netherlands and Austria to pare the shortfall or face fines.
No country has yet been fined for breaching the deficit limit. Penalties could reach 0.5 per cent of GDP and would be imposed by EU finance ministers, under a voting system skewed toward larger countries.
Every country except France, Germany and Portugal will keep its deficit below three per cent this year, the commission estimates. Any sanctions for excessive deficit would be imposed on individual countries, not on the 12 collectively.
Deadline for France
The commission, which oversees the budget rules, said Germany is taking steps to cut its deficit while France faces a 3 October deadline to show it is serious about doing so.
"The question is whether France will follow Germany in respecting the recommendations," Thomas said. "There is now a risk that the whole euro zone will have a budgetary deficit this year close to three per cent or above."
German Chancellor Gerhard Schroeder has endorsed France's call for a flexible application of the budget rules, while stopping short of siding with French President Jacques Chirac in his bid to get the rules suspended.
Governments are under pressure to tackle unemployment. The jobless rate in the euro area held at 8.9 per cent in July, the highest level since November 1999, the Luxembourg-based European statistics office said today.
"We still estimate recovery will come in the second half," Thomas said. A recovery in consumer spending and retail sales point to the rebound getting under way at the end of the third or beginning of the fourth quarter, he said.