France told October is deadline on deficit

The European Commission yesterday told France it had until October to take "necessary steps" to reduce its rising government deficit.

But against a backdrop of rising unemployment and falling government revenues, economists said Paris was almost certain to breach European Union budget rules as laid down by the stability pact for the third year in a row in 2004.

Marking the start of what may prove to be delicate negotiations with Brussels, Mr Francis Mer, France's finance minister, promised to bring the budget deficit below the 3 per cent of gross domestic product ceiling next year.

Letters to ministers spelling out a spending freeze are being sent this week. Ministers will be asked to spend no more in 2004 than in 2003.

Economists doubt this will be sufficient. Société Générale forecasts that France's deficit will be as much as 4.2 per cent this year and still be at 3.8 per cent in 2004 because of the sharper-than-expected slowdown in economic growth.

The European Commission said the deficit was not the result of a mitigating severe economic downturn but came about mainly from slippages in expenditures and tax cuts.

Germany and Portugal, which are also in breach of the pact, are making tough spending cuts and are confident of bringing their deficits below 3 per cent of GDP .

If the French government fails to take sufficient steps to address the deficit, the Commission's next move will be to make specific proposals. The "nuclear option" of fines would have to be approved by a qualified majority among EU finance ministers. - (Financial Times Service)