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Published: Friday April 4, 2014 MYT 2:46:40 AM
Updated: Friday April 4, 2014 MYT 2:48:33 AM

New French government to seek more leeway on deficit deadlines

PARIS (Reuters) - France's reshuffled government lost no time on Thursday in indicating that it will seek to renegotiate its deficit-reduction deadline with the European Commission, setting it on a collision course with its EU partners.

New Finance Minister Michel Sapin hinted that Paris hoped to secure greater understanding in Brussels for its efforts to win a further delay in its budget target by parachuting his predecessor, Pierre Moscovici, into a key EU economic post.

In his first day in the job, Sapin gave the clearest signal yet that France may not bring its public deficit under the EU treaty limit of 3 percent of national income in 2015 as promised.

"The goals, these are goals we will stick to, that is part of the overall line ... It is the path, the timing itself which will be discussed, with common interests in mind - this is not about France begging on its knees," he told France Inter radio.

"It is in Europe's interest to find the right timing ... Europe will be better off when France is better off," he said.

Describing reviving growth as "the mother of all battles", Sapin indicated the new government will not put budgetary rigour ahead of nurturing a recovery gradually taking root in the euro zone's second-biggest economy.

That has gone down badly with Berlin and the current EU Commission, both of which recalled this week that France had already been granted extra time to cut its deficit.

Germany's finance minister hinted that Paris should not be given further flexibility after a meeting with his peers from the European Union in Athens.

"I would like to point to what (EU Economic and Monetary Affairs) Commissioner Olli Rehn said, namely that France is aware of its responsibility and that the deadline in the current process has been extended twice," Wolfgang Schaeuble told journalists on Wednesday.

But the budget expert of the parliamentary party of Merkel's CDU, Norbert Barthle, told Reuters he did not completely rule out a new agreement being reached:

"If indeed new concessions are to be made, then in our view they should only be made under clear conditions. It must be evident that France is really introducing measures that will allow it to hit its deficit target."

France appears to be banking on obtaining a top economic portfolio when the next Commission takes office in November, following EU parliament elections in May, which could make it easier to win yet another reprieve from Brussels.

A revision of European GDP accounting rules due in May will also play in France's favour by boosting the economy's value on paper, which in turn would reduce the size of the deficit as a percent of GDP.

Rehn last year granted Paris an extra two years until 2015 to meet the target and said the EU expected serious reforms of labour markets, pensions and the welfare state in return. He has since urged France to do more on the reform front.

DYNAMIC DUO OR ODD COUPLE

Sapin and Moscovici were all smiles at a handover ceremony, with the former suggesting the latter would be in close contact in a future role.

"Pierre Moscovici is leaving, but leaving perhaps to take up other responsibilities, because he has the capacity, experience and passion at the European level to defend France's interests," Sapin said.

Both used the same word as Economy Minister Arnaud Montebourg in talking of "reorienting" Europe's focus towards growth.

"In charge of the Economy Ministry, we will be activists for growth and fight any form of deflation, recession or austerity,"

said Montebourg, an anti-globalisation leftist promoted from his post as industry minister in this week's cabinet reshuffle.

France must send the European Commission its so-called fiscal stability programme by the end of this month detailing how it plans to bring its deficit within the 3 percent target next year.

The EU executive warned Paris last month that it was on course to miss the targets, and EU officials urged France to respect its promise after Hollande hinted this week that he would seek leniency.

Concern was compounded when official figures released on Monday showed the deficit strayed off target again last year, reaching 4.3 percent of GDP instead of the planned 4.1 percent.

Sapin's comments left France's creditors unfazed. Investors put in bids worth more than twice the 7.5 billion euros (6.2 billion pounds) sold at a bond auction on Thursday and yields were marginally lower on the benchmark 10-year and 30-year bonds.

France may find an ally in Italy, whose Prime Minister Matteo Renzi has promised sweeping tax cuts to revive growth despite little wiggle room to keep its deficit below the EU limit.

Though Sapin will represent France at international economic forums, he will share responsibility for speaking on the economy with Montebourg, who favours a strong state hand in business to promote and protect national champions.

French commentators have said the arrangement could lead to confusion over policy, but Sapin dismissed such concerns, saying the duo would not form a two-headed monster fighting itself.

"We will act with one sole voice, even if there are two heads, four legs and four arms," he told journalists.

As industry minister, Montebourg raised eyebrows by attacking the European Central Bank and the Commission for doing too little to boost growth, railing against the euro's strength.

(Writing by Leigh Thomas; Additional reporting by Noah Barkin in Berlin; Editing by Paul Taylor, Alison Williams and Hugh Lawson)

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