France defies pact with tax cut

The battle lines were drawn yesterday over the future of Europe's single currency rules, as France defied its partners and announced a 3 per cent cut in income tax. The move means France is almost certain to break the EU's budget deficit rules in 2004 for the third successive year.

Finland led demands from other single currency members for the European Commission to apply the stability pact firmly, which could see Brussels proposing tough fines on Paris.

Meanwhile, Mr Lucas Papademos, ECB vice-president, said the bank's governing council noted with "great concern" the recent fiscal developments in the euro zone, and warned they could make rate cuts less likely.

But French president, Mr Jacques Chirac won some support from German Chancellor, Mr Gerhard Schröder, whose own country may breach the deficit ceiling of 3 per cent of GDP again next year. Speaking after an informal Franco-German summit in Dresden, Mr Schröder said he agreed with Mr Chirac on "the rejection of a dogmatic focus on one aim in the pact".

Mr Chirac's fulfilment of his promise to cut tax by 30 per cent over five years - despite a 4 per cent deficit this year - sets the scene for an explosive meeting of EU finance ministers in Italy next week.

Most single currency members and many of the 10 EU candidate countries are expected to warn that France is damaging the euro and European solidarity. The likely confrontation could not come at a worse time: Sweden will vote less than 48 hours later on September 14th on whether to join the single currency.

The French government's spokesman, Mr Jean-Francois Cope, yesterday said the decision was "well understood" by France's European partners.

"Solving problems by raising taxes is an archaic attitude," said French prime minister, Mr Jean-Pierre Raffarin in an interview with Le Figaro. Despite his own finance ministry officials warning that a 1 per cent cut in income tax was the most the public purse could afford, Mr Raffarin has rallied to the position of the French president.

Finish prime minister, Mr Matti Vanhanen, yesterday said his country would not accept any changes to the EU's stability pact.

"Every member-state in the stability pact has a responsibility to act so that we can have stability in the European economy."

Separately, Mr Schröder and Mr Chirac said they planned an economic initiative in the EU to promote growth via investment in research and development, arguing that a similar initiative by Italy, current EU president, did not go far enough. - (Financial Times Service)