No reason to again give France more time to cut deficit: Rehn

BRUSSELS Sat Apr 5, 2014 8:17am EDT

European Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference on macro-financial assistance to Ukraine, in Brussels March 19, 2014. REUTERS/Francois Lenoir

European Economic and Monetary Affairs Commissioner Olli Rehn addresses a news conference on macro-financial assistance to Ukraine, in Brussels March 19, 2014.

Credit: Reuters/Francois Lenoir

BRUSSELS (Reuters) - There is no reason to further extend a European Union deadline for France to cut its budget deficit, the EU's top economic official said on Saturday, adding policy-makers should have learnt the lessons of the debt crisis and stuck to agreed rules.

In June last year Paris got two more years, until 2015, to bring its budget shortfall below the EU ceiling of 3 percent of gross domestic product (GDP), from a 4 percent gap the European Commission expects it to have this year.

But after a government reshuffle this week, France said that while it agreed the deficit should fall, it wanted to discuss the deadline again as slower cuts would help the economy grow.

Under new EU budget rules, made stricter during the sovereign debt crisis to prevent runaway state spending, if a country ignores EU deficit reduction deadlines it can be swiftly fined.

EU Economic and Monetary Affairs Commissioner Olli Rehn, the only person who can propose a deadline revision, said there were no grounds for it.

"If I refer to the Stability and Growth Pact (EU budget rules), a new extension could only be justified if there were unexpected adverse economic events with major unfavorable consequences for government finances," Rehn told Reuters.

"I don't see that there have been such unexpected adverse economic events since last June. On the contrary, the euro zone economy has actually been experiencing a strengthening ... recovery," Rehn said.

His comments echo remarks from the top conservative candidate for European Commission president, and the head of the German Bundesbank, who both came out against granting France more time to cut its deficit, warning such a move would set a dangerous precedent for other EU states.

Official figures released on Monday showed the French deficit strayed off target again last year, reaching 4.3 percent of GDP instead of the planned 4.1 percent.

RISK OF HISTORY REPEATING ITSELF?

The situation has some resemblance to a dispute from 10 years ago, when France and Germany prevented the EU's executive arm from stepping up disciplinary budget action against them, even though they failed to cut deficits under the existing rules.

The dispute between the two biggest euro zone countries and the European Commission lead to a watering down of EU budget rules in 2005.

Some among European governments then drew the lesson that they did not need to take seriously the EU budget rules, which limit government deficits to 3 percent of GDP and debt to 60 percent of GDP, because disciplinary action has no teeth.

Many policy-makers believe this "original sin", of the two biggest euro zone countries not respecting EU budget rules and getting away with it, was at the foundation of the sovereign debt crisis that started in 2010 when Greece revealed how unsustainable its public finances had become.

The Greek budget deficit, already well above limits in 2005 at 5.2 percent of GDP, grew steadily after that to 15.7 percent in 2009.

The full extent of the problem went undetected earlier because the Greek government was falsifying statistics and other EU countries would not give the Commission the right to check the accuracy of government accounts.

Asked if there was a risk that a large country like France would again try to undermine the new, stricter budget rules, Rehn said: "Precisely because the policy makers of the euro zone are aware of that risk and should have learnt the lesson, we need to make sure that we respect those reformed rules of the smarter Pact."

This time, Paris does not have Germany on its side. Berlin, now a model of fiscal health, has repeatedly said France must stick to the promises it has made on the deficit.

Rehn said that if it does, it would be to France's benefit.

"Recent economic history shows that those who have been able to take good care of public finances are stronger economies and have better growth," he said.

"If you look at Germany, at countries that have reformed rapidly and effectively like Ireland, or Latvia or even Spain, you see that an effective and rapid turnaround of fiscal policy brings better results than letting things drag on," Rehn said.

By the end of April, Paris has to send the European Commission its fiscal plans setting out how it wants to bring its deficit within that target.

(Editing by David Holmes)

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