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
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
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
"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.