UPDATE 1-France set to miss key deficit target -European Commission

Mon May 5, 2014 8:05am EDT

Related Topics

* Commission sees French budget deficit at 3.4 pct in 2015

* Spain set to miss its deficit goal too

* Greece, Portugal deficits seen falling (Adds French reaction, details)

By Jan Strupczewski

BRUSSELS, May 5 (Reuters) - France will miss its 2015 budget deficit target unless it makes rapid policy adjustments, the European Commission warned on Monday as it unveiled updated economic forecasts for the 28 countries in the European Union.

France was meant to have cut its deficit to 3.0 percent of gross domestic product by 2013, but the EU extended the deadline by two years due to extremely weak growth in the euro zone's second largest economy.

Paris then delivered a 4.3 percent deficit in 2013 instead of 4.1 percent and is set to miss this year's target too. At the same time, other euro zone countries in far more difficult economic circumstances have managed to meet their obligations.

French Prime Minister Manuel Valls reaffirmed last Wednesday that France intended to stick to the 3 percent target for 2015 after the French parliament backed a 50 billion euro package of savings that will be implemented through to 2017.

Finance Minister Michel Sapin, who will meet his euro zone peers in Brussels later on Monday, said in a statement that Paris would meet the 3 percent target in 2015.

"The government reaffirms its determination to ... make 50 billion euros worth of savings to bring the deficit to 3 percent of GDP in 2015 and bring the pace of public spending growth in line with inflation," he said.

But the Commission, the EU's executive, forecast that unless France goes even further it will end up with a deficit of 3.4 percent of GDP next year. If Paris fails to meet the 3 percent target without a good excuse, it could face fines.

France's refusal to accept disciplinary action for missing its budget deficit target in 2003 lead to a softening of budget rules, which was one of the causes of the sovereign debt crisis that afflicted the euro zone from 2009-2013.

DIFFERENT FORECASTS

The difference in forecasts for the 2015 deficit between the Commission and France may partly reflect a more optimistic view of economic growth in Paris, where the government sees GDP expanding by 1.7 percent. The Commission expects 1.5 percent.

Sapin said the Commission's forecasts took into account only 17.5 billion euros of a total 21 billion euros of savings planned by France in 2015.

This year, the Commission expects a French deficit of 3.9 percent - 0.1 point higher than the government predicts.

EU policymakers believe France must meet the 3 percent target to uphold the credibility of budget rules for the bloc - known as the Stability and Growth Pact - that were sharpened in 2012 to prevent another debt crisis.

After years of bitter austerity and reforms, Greece will have reduced its budget deficit to 1.0 percent in 2015 from 1.6 percent this year, the Commission said. The shortfall was 12.7 percent in 2013.

Another country that must do more to tackle its budget gap is Spain, the Commission said, projecting that unless Madrid changes policy, the deficit will grow to 6.1 percent in 2015, from 5.6 percent expected this year.

Last week, Spanish Economy Minister Luis de Guindos said his country was on track to meet its 2015 deficit goal of 4.2 percent of GDP, even though the government is forecasting growth of just 1.8 percent next year. The Commission sees a 2.1 percent expansion in the economy.

Portugal, which will exit its EU/IMF bailout programme later this month, will reduce its budget gap to 4.0 percent this year and 2.5 percent in 2015, the Commission said, with economic growth in those years of 1.2 and 1.5 percent respectively. (Additional reporting by Ingrid Melander in Paris; Reporting by Jan Strupczewski; Editing by Catherine Evans)

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