CORRECTED-UPDATE 2-Hollande says France can still hit 3 pct/GDP budget gap

Fri Dec 21, 2012 8:20am EST

Related Topics

* President says EU deficit limit still within reach in 2013

* UE's Rehn says more austerity not essential for France (Clarifies quote in fourth paragraph)

PARIS Dec 21 (Reuters) - France aims to bring its budget gap back within European Union limits next year, President Francois Hollande said, despite new evidence the economy is close to stagnating.

Many analysts believe Hollande's government will have little choice but to make additional spending cuts if it is to hit the 3 percent of GDP target, but a top EU official said he did not consider more belt-tightening essential.

Hollande said the long-standing 3 percent target for the 2013 budget deficit remained in force, despite what would be a "difficult year" for the economy.

"There's no recession, not in France," he told Europe 1 radio. "But it will be difficult because when we have nearly zero growth in the first half of the year, unemployment will keep rising."

French statistics office INSEE estimated late on Thursday the economy would eke out growth of only 0.1 percent this year, missing the government's forecast for 0.3 percent and dropping from 1.7 percent in 2011.

More worryingly, INSEE said the picture would improve only marginally heading into 2013, estimating growth of 0.1 percent in both the first and second quarters.

Many economists say that Hollande's government will have little choice but to make painful budget cuts to meet the target as growth proves stubbornly weak.

But EU Economic and Monetary Affairs Commissioner Olli Rehn said France already had a credible budget and that more cuts did not appear necessary.

"Additional savings measures are not essential," Rehn said in an interview with Friday's Le Monde newspaper. "Once you have a credible medium-term budget strategy, including on reforms, you can have a softer adjustment."

LABOUR REFORMS

Such reforms would include changes to labour legislation, which Rehn said France needed to address if it was serious about tackling unemployment, which INSEE forecast was set to hit a 15-year high of 10.9 percent of the workforce by mid 2013.

The EU commissioner also urged further pension reforms.

Hollande said he expected unemployment would begin to fall by late 2013.

French employers and trade unions announced overnight that they had failed to reach an accord on labour market reforms seen essential to unlocking more growth potential from the euro zone's second largest economy.

The two sides are set to hold new talks starting Jan. 10, extending the initial year-end deadline Hollande originally set for what he said must be an "historic" accord.

"We must not miss this opportunity ... everyone must assume their responsibilities," he said.

In a brief ray of light for the French economy, business morale data published by INSEE on Friday showed that sentiment in the manufacturing sector rose for the second month in a row in December. (Reporting by Leigh Thomas and Mark John; editing by Vicky Buffery and John Stonestreet)

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