Sunday, October 12, 2003

You're Off the Hook

I've just posted on this over at fistful. The French are to be given an extra year to get their fiscal act together. This is more a sign of impotence than a seal of approval. In the end I agree with this approach, there is really nothing - except ridicule - to be gained from imposing a symobolic fine. But the point is that this should not be necessary. Everything here seems to be calculated. But still Austria, the Netherlands and Finland don't seem too happy. So how fine is the calculation? How often can you take advantage of the impotence of the other before a limit is reached? I have no answer to this, but I know the answer is out there somewhere. I guess we'd better all just hope - although I'm not personally too convinced - that the EU Commission growth provisions are fulfilled, and that we aren't going to see an even worse re-run of this next year.

France is set to be given an extra year to comply with the EU's budget rules, after Francis Mer, finance minister, indicated he will make extra efforts to trim his country's record budget deficit. A majority of European finance ministers now admit there is nothing they can do to stop President Jacques Chirac's government from breaking the EU's stability and growth pact for a third successive year in 2004.

Diplomats yesterday con ceded that France will have to be given until 2005 to comply with the rules, but they still expect Mr Mer to offer something in return. Paris will escape fines potentially worth billions of euros. French officials expect Mr Mer to make his peace offering next month, agreeing to European Commission requests to cut further France's underlying deficit and to make additional structural reforms. The modest concessions will be a belated signal that France is conscious of its responsibilities to other eurozone countries to keep its deficit under control. But they do nothing to disguise the fact that the stability pact - once a feared instrument of fiscal discipline - has been exposed as largely toothless.

Diplomats said that Mr Mer gave a "conciliatory" presentation of his 2004 budget to his 11 fellow members of the eurogroup - the informal gathering of single currency finance ministers - over dinner in Luxembourg on Monday night. "A lot of member states had felt the French weren't taking it [the breach] seriously . . . but that's not the case anymore," said Charlie McCreevy, Irish finance minister. By yesterday it was clear that almost all the finance ministers were now resigned to a "flexible" interpretation of the pact in relation to France. Only Austria, the Netherlands and to a lesser extent Finland maintained a hard line, suggesting the Commission should apply the pact ruthlessly and press for sanctions against France if necessary. "The outcome of the dinner was that everyone agreed we must try to find a reasonable solution to this problem," a French government spokesman said.

Diplomats from other EU countries expect the Commission to propose this month that France tightens its structural deficit by about 1 per cent - slightly more than the 0.7 per cent currently proposed - and to make further economic and social reforms. They expect Mr Mer to comply with the request before the end of the year, although it will not be enough to bring the French deficit below the stability pact ceiling of 3 per cent of GDP. Mr Mer's tone, in sharp contrast to some bullishly nationalistic performances at past eurogroup meetings, has persuaded countries such as Spain and Belgium to adopt a softer approach towards France.

Hans Eichel, German finance minister, also welcomed the change of tone. "It is very satisfactory that France has clearly committed itself to the [EU budget rules], to the discussions and recommendations within Ecofin . . . and wants to do everything to stay within the framework," he said. Mr Eichel's own budget deficit is expected to exceed 3 per cent for a third successive year in 2004, but he has stayed out of the line of fire by making it clear that he would do his best to observe the rules.
Source: Financial Times

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