France to come under pressure for breaking budget promises

MILAN Italy (Reuters) - France will come under pressure from its euro zone peers on Friday to do more to keep its budget promises, diplomats said, after Paris said on Wednesday it would delay cutting its deficit by two more years.

French Finance minister Michel Sapin leaves the Elysee Palace following the weekly cabinet meeting in Paris September 10, 2014. REUTERS/Philippe Wojazer

Euro zone finance ministers meet for informal talks in Milan on Friday, and high on the agenda will be the recently revamped EU budget rules, which limit budget deficits and debt and set deadlines for their reduction, officials said.

Paris was supposed to bring its budget deficit below the EU ceiling of 3 percent of GDP next year, after six straight years of violating the limit. It had missed a 2013 deadline and got a two-year extension, until 2015, from EU finance ministers.

But on Wednesday, French Finance Minister Michel Sapin said that his country would bring the deficit below the EU limit only in 2017. The budget gap will grow this year, not shrink, because of slower economic growth, he said.

“I would be surprised if countries that have to make an effort to stick to commitments would not question what Sapin said,” one senior euro zone official said. “I would assume that countries that have reformed and consolidated will expect France and Italy to do the same.”

The French announcement drew some immediate criticism from Germany, whose government does not want to borrow next year at all, and some other euro zone countries.

“Such excesses hurt the debate about a reasonable flexibility of rules, which is supposed to be accessible only to countries fulfilling their obligations to fix public finances and putting deficits below 3 percent,” one senior euro zone official said.

Euro zone ministers are likely to tell Sapin that the economies of several countries in the euro zone are growing more slowly than expected, and this cannot be an excuse.

“The key message will be that the rules apply to everyone, no matter the size of the country or specific domestic issues,” a second senior euro zone official said.

Matters may become more complicated, however, after a speech that European Central Bank President Mario Draghi delivered on Aug. 22 in Jackson Hole. He said a fiscal contribution to the monetary stimulus to help the economy grow would be welcome.

Draghi said the flexibility within the EU budget rules could be used to better address the weak recovery and make room for the cost of needed structural reforms.

He also drew a distinction about the overall fiscal stance of the euro zone as a cluster of 18 economies and the national fiscal policies of individual countries.

“It may be useful to have a discussion on the overall fiscal stance of the euro area,” he said. Some policymakers interpreted that as a hint that because Germany has a balanced budget, others who are in worse shape can afford more spending to boost growth.

“Stronger coordination among the different national fiscal stances should in principle allow us to achieve a more growth-friendly overall fiscal stance for the euro area,” Draghi said.

But Draghi also made clear that governments must do their part.

“No amount of fiscal or monetary accommodation, however, can compensate for the necessary structural reforms in the euro area,” Draghi said in the speech. “This reform agenda spans labour markets, product markets and actions to improve the business environment.”

Italy, which holds the rotating presidency of the European Union, is also keen to exploit the flexibility that EU budget rules offer, focusing on the leeway that structural reforms can generate for a country undertaking major changes.

Draghi and Jeroen Dijsselbloem, who chairs meetings of the euro zone’s finance ministers, warned the 18 countries using the euro there was no other way towards sound recovery and regaining competitiveness than structural reforms.

The problem is that such reforms bring tangible effects only several years after they are introduced and there is no precise way to measure in advance how successful they will be.

Yet EU budget rules allow for budget leeway commensurate with the beneficial effects the reforms are to bring in the future, making the decision of how much leeway to grant in the present political and difficult.

The debate in Milan is to focus on how to measure and evaluate structural reforms, after Italy’s finance minister Pier Carlo Padoan proposed a system of benchmarking such reforms to make the task easier.

“The idea is basically to have the European Commission evaluate progress made by each country on reforms by comparing them and looking at the positive or negative fallout on other countries,” one euro zone official said.

Reporting By Martin Santa, Jan Strupczewski, Francesca Landini and the Ecofin team; Editing by Larry King