Ecofin nears French budget deal

EU governments yesterday looked to be close to a deal on defusing a row over French budget deficit plans as they prepared to gather this week at key meetings of leaders and finance ministers.

The new French government has insisted planned tax cuts would go ahead and has questioned the need to balance the national budget by 2004 - as all EU countries have agreed under the guidelines of the EU's Stability and Growth Pact.

Officials in EU capitals said governments were working on the issue in the hope of brokering a deal at today's meeting of EU finance ministers in Madrid to accommodate French interests without undermining the Stability Pact drive to cut deficits.

European central bankers reacted to the political manoeuvring with a flurry of comments stressing the pact's importance and warning about the risk of damaging investor confidence in the euro zone if its guidelines are not respected. The suggestion circulating ahead of the meeting in Madrid was that all countries recommit to reaching budget balance by around 2004, but adding - crucially - that this goal would depend on the rate of economic growth in coming years.

Calming fears that the issue would disrupt the EU summit in Seville tomorrow, German Chancellor Mr Gerhard Schröder said he believed France would clarify its position and clear the air at Madrid talks among finance ministers on the eve of the summit.

"I don't expect this question will play a big role at the EU summit in Seville because France will clarify the situation at the EU finance ministers meeting beforehand," he said.

French Finance Minister Mr Francis Mer would tell EU colleagues tonight that France was not questioning the Stability Pact itself and would reduce its deficit "as soon as possible", a French official said. "France will... stick to the line it has always taken, that is to say that it will respect the goals of the Stability and Growth Pact as soon as possible." But Mer would not talk of dates, he said.

Meanwhile, prominent members of the Frankfurt-based European Central Bank warned against any talk of undermining a pact designed to protect the euro currency when it arrived in 1999.

ECB chief economist Mr Otmar Issing, quoted by German weekly WirtschaftsWoche in an interview, said any such talk would be "extremely damaging". The chief economist of the Bundesbank, Mr Hermann Remsperger, also warned that tampering with deficit control agreements could damage investor confidence. But Italy's deputy treasury minister Mr Mario Baldassarri said the EU summit must decide if it was better to have zero deficits or a small deficit and faster growth.

Further efforts are needed by some members of the euro zone to balance their budgets in 2004, the European Commission said in a report published yesterday. The report, "The Euro Zone in the World Economy - Developments in the First Three Years", named Germany, France, Italy and Portugal as having "appreciable" budget deficits. "There are still appreciable budget deficits in Germany, France, Italy and Portugal. Further consolidation efforts are necessary to reach positions that are close to balance in 2004," the report said.

It also said price developments had been in line with the ECB's view of stability but monetary policy was too tight for some states and too loose for others. "Inflation expectations have remained compatible with the ECB's quantative definition of price stability," it said.