[A-List] EU stability & growth pact: France

["Michael Keaney" <michael.keaney@xxxxxx>]

French budget heralds new stability pact clash
By Robert Graham in Paris and George Parker in Brussels
Financial Times: December 20 2002

The prospect of more clashes between Paris and the European Commission over
breaches of the eurozone stability pact increased yesterday, after the
French parliament endorsed a 2003 budget based on an ambitious 2.5 per cent
growth forecast.

The Commission is expected to hand France a formal early warning over its
budget plans early next year, implying that Brussels sees the forecast as
unrealistic.

Mindful of a budget deficit which is likely to hit the stability pact
ceiling of 3 per cent of GDP, finance ministry officials in Paris hinted
that the government was ready to freeze certain items of spending. Spending
controls could even be introduced in the first months of the New Year,
private sector economists suggested. They said that this was the only way
the government could hold the budget deficit below the pact's ceiling and
come close to the 2003 budget target of 2.6 per cent.

Finance Minister Francis Mer had already hinted in October that the
government might have to introduce an austerity plan. Even prime Minister
Jean-Pierre Raffarin admitted the 2003 growth target was "ambitious".

But on Thursday Jean-Francois Coppé, a spokesman for Mr Raffarin's
centre-right government, said: "We are already working on the 2004 budget
which will clearly show the government's determination to meet its European
obligations while also working on its own set of priorities."

The 2003 budget was partially inherited from the previous Socialist-led
government, but it has had to accommodate a spending overshoot in the
current year - made worse by tax cuts that were promised by President
Jacques Chirac during his successful campaign for re-election.

The economic slowdown has cut treasury receipts, further exacerbating the
budget deficit. France's failure to make structural adjustments in spending
and a refusal to drop tax cuts - introduced after the centre-right won the
June parliamentary elections - has already produced rebukes from Brussels
and other eurozone members.

At the same time, this year's slowdown will be reflected in much weaker tax
receipts for the treasury in 2003. As a result public borrowing will
increase with the national debt stock touching 58.5 per cent of GDP - close
to the 60 per cent ceiling fixed in the Stability Pact.

Germany, which this year exceeded the stability pact's deficit ceiling of 3
per cent of GDP, has promised to tackle the problem next year.

The European Commission will look at German and French budget plans in
January, and will deliver its verdict on whether it believes their so-called
"stability programmes" are realistic.