European Commission to tell France to cut deficit

The European Commission will tell France today to cut its structural deficit next year by more than planned but will give it an extra year, until 2005, to meet EU budget rules, according to Commission sources.

The European Union executive will insist Paris cut its structural deficit, the shortfall adjusted for economic swings, by one percentage point of gross domestic product in 2004 and a further 0.5 percentage point in 2005, a source said.

The move will be closely watched by Germany, which is also struggling to rein in a deficit that is expected to exceed the EU ceiling of 3 per cent of GDP this year for the second year in a row and possibly also in 2004.

France would be given until the end of December to confirm officially it was implementing the measures, which go beyond the 0.7 percentage point cut in the structural deficit in the draft 2004 budget currently going through parliament.

The recommendation, to be endorsed by EU finance ministers in early November, assumes 1.7 per cent real growth in 2004, the same as the French government's forecast, the source said after senior EU officials met to prepare the Commission decision.

"There are some commissioners who don't think it [deficit reduction demand\] is enough," the source said, but added that the figures would not change.

"France will have until the end of December to say how it is going to put these recommendations into practice."

The Commission declined comment. However, EU economic and monetary affairs spokesman Mr Gerassimos Thomas had earlier said the recommendations would make sense for the French economy while respecting EU budget rules.

Citing sluggish economic growth, Paris has flouted orders to bring its 2004 deficit below the EU cap of 3 per cent of GDP by drawing up budget plans that foresee a deficit well beyond that limit next year - the third year in a row.

France's 2004 budget forecasts a deficit of 3.6 per cent after a projected 4 per cent this year and a shortfall of 2.9 per cent in 2005.

The EU executive, which enforces budget discipline, has therefore had to move to the next step in a disciplinary action against France - the furthest it has gone in a procedure whose ultimate sanction is huge fines.

But it has been clear for weeks that the Commission had no interest in fining France and would give Paris extra time to rein in its deficit - a move that could presage more leniency towards Germany, also struggling to cut its deficit to order.

EU Economic and Monetary Affairs Commissioner Mr Pedro Solbes says it would be unreasonable to force the French deficit below 3 per cent in 2004, even though the Stability Pact imposes this timetable.