France threatens to ignore rebuke over budget deficit

France  has threatened to ignore a rebuke from Brussels over its budget deficit, saying that promoting economic growth was more important than cutting spending. EU finance ministers agreed yesterday to issue an "early warning" to Paris that it was in danger of breaching the 3 per cent budget deficit limit laid down in the Stability and Growth Pact.

The French finance minister, Mr Francis Mer, abstained in the vote and said later that, with the euro zone threatened with recession, it was a mistake to endanger growth by imposing harsh spending cuts. "It is not at all the time to penalise growth by an overly strong reduction in state spending," he said.

The Economic and Monetary Affairs Commissioner, Mr Pedro Solbes, responded by reminding Mr Mer that recommendations on France's deficit were binding. "France is a member of the Union and France cannot ignore the obligations of the treaty. France has to make a contribution to maintaining and increasing the confidence in our currency, the euro," he said.

The Minister for Finance, Mr McCreevy, acknowledged that many economists believed the rules of the Stability and Growth Pact were no longer appropriate for the euro-zone economy. But he defended the decision to rebuke France, not least because it would be wrong to change the rules only when they created a problem for a large member-state. "The rules are the rules and they have to be applied evenly," he said.

Mr Mer objected to two aspects of the warning - a 2006 deadline for achieving a virtual balancing of the budget and a requirement to cut the French deficit by 0.5 per cent of GDP a year. Paris expects its deficit to reach 2.6 per cent of GDP this year, but the Commission believes this forecast to be too optimistic.

The ministers also warned Germany it could breach the 3 per cent limit for a second year running and called for labour market reforms to boost growth.

"Council stresses again that the German economy, despite its large size, remains highly vulnerable to external shocks and unable to generate an endogenous and durable growth process. The level of growth potential in Germany is currently low. It is in the hands of the German government to raise it significantly through coherent reforms notably of the labour market," the ministers said.

Berlin accepted the ministers' demand that it should take steps to reduce public spending by May 21st. Germany's finance minister, Mr Hans Eichel, said his government would succeed in bringing its deficit below 3 per cent of GDP, even if the German economy grew by only 1 per cent this year.

The ministers also asked Italy for more information on how it planned to keep its budget deficit under control and expressed concern about Greece's budget policy.