EU sees France missing deficit target

PARIS Wed Nov 7, 2012 7:06am EST

PARIS (Reuters) - The European Commission sees France missing its target of cutting its public deficit to 3 percent of output next year because of slower-than-expected growth, throwing a deficit-cutting trajectory into doubt.

The EU's executive arm saw economic growth in France of just 0.4 percent next year, half the 0.8 percent level on which the government's 2013 budget is based.

In its autumn forecast, the Commission said that France's budget deficit would fall to 3.5 percent of gross domestic product next year, above the EU target, and would only drop below 3 percent in 2014.

"After three quarters of stagnating GDP and historically low levels of corporate profitability, prospects for an imminent recovery have waned," the report said. "Specific downward risks relating to the French economy weigh on the potential recovery."

The forecast matches International Monetary Fund estimates for growth and deficit reduction and is slightly more optimistic on GDP than a Reuters poll of economists, which predicts growth 0.3 percent next year.

France's 2012 deficit is seen around 4.5 percent of output.

The Commission's forecasts chime with the views of many economists who believe Socialist President Francois Hollande has based his budget on over-optimistic growth targets as the country struggles to rebound from three quarters of stalled output.

In September Hollande unveiled France's toughest budget in 30 years, relying on a combination of hefty tax hikes for companies and the wealthy and checks on public spending to bring the deficit down by 30 billion euros.

Hollande's fiscal credibility is under scrutiny from foreign investors who are concerned France's record-low bond yields do not accurately reflect the fragility of its economy.

Bank of France Governor Christian Noyer said last month he believed that Hollande's Socialist government would be able to meet the 3-percent target but expressed regret that the government was not cutting spending.

The Commission said that tax hikes programmed in the 2013 budget were likely to weigh on consumer spending as well as employment, holding up recovery next year, while declining competitiveness could reduce exports.

It also highlighted stronger capital requirement for banks as potentially limiting new lending, which would have a knock-on effect for investment and business sentiment on the whole.

(Reporting by Jean-Baptiste Vey and Nick Vinocur; Writing by Catherine Bremer; editing by Mark John/Jeremy Gaunt)

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