France must reform to keep its side of EU bargain: Rehn

BRUSSELS Mon Feb 10, 2014 9:08am EST

European Union Economic and Monetary Affairs Commissioner Olli Rehn presents the EU executive's autumn economic forecasts during a news conference at the EU Commission headquarters in Brussels November 5, 2013. REUTERS/Francois Lenoir

European Union Economic and Monetary Affairs Commissioner Olli Rehn presents the EU executive's autumn economic forecasts during a news conference at the EU Commission headquarters in Brussels November 5, 2013.

Credit: Reuters/Francois Lenoir

BRUSSELS (Reuters) - France must implement economic reforms to keep its side of a bargain with the European Commission which granted Paris more time to cut its budget gap in return, EU economics chief Olli Rehn said on Monday.

Last May, the Commission gave France two extra years to bring its budget deficit to within the EU limit of 3 percent of gross domestic product, rather than move towards fines for Paris for missing the original 2013 deadline.

The rationale behind the decision was that less fiscal austerity would help sustain France's meager economic growth and let Paris carry out labor and pension reforms to regain lost business dynamism while cutting public spending.

France was also to simplify its tax system to help firms compete and make its pension system sustainable by 2020.

Other countries granted more time for deficit cuts last year included Spain, Belgium, and the Netherlands.

"This was done on the condition that these countries undertake serious economic reforms," EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview at the Reuters Euro Zone Summit.

"Now we see that one half is being implemented -- that's the extensions of the correction deadline for the excessive deficit -- while there is much room for significant intensification in structural reforms in many member states like France and Italy," he said.

PATIENCE MAY BE RUNNING OUT

Asked if France was not keeping its side of the bargain, Rehn said:

"If President Francois Hollande and the French government now undertake an intensification of economic reforms in line with what President Hollande has indicated, then France will keep its side of the implicit agreement."

Italy, even though it reduced its deficit to within the EU limits in 2012 and is no longer under an EU disciplinary procedure like France, was also lagging with promised reforms to make its economy more dynamic.

To make sure countries take reforms more seriously the European Commission may in future grant more time for deficit cuts only after governments actually do implement reforms, rather than just because they promise to do so, Rehn said.

"We can turn the burden of proof around -- we can grant an extension of correcting the excessive deficit once we see concretely that a country has implemented real, serious economic reforms, which enhance competitiveness, the growth potential and the sustainability of public finances," he said.

Apart from France and Italy, Rehn also noted his native Finland had become less competitive since 2005-2006.

"All these countries ... lost cost competitiveness, they have lost market share and have higher unemployment and lower growth and therefore there is a need for intensified action in economic reforms," he said.

Spain, Ireland, Portugal and Latvia, on the other hand, started to control their labor costs and now had rising exports, industrial production and signs of improving domestic demand and employment, Rehn said.

(Additional reporting by Paul Taylor. Editing by Mike Peacock)

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