France's Hollande signals possible EU deficit debate

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Published October 29, 2012

| Reuters

President Francois Hollande hinted on Monday at a future EU-wide debate on the bloc's deficit reduction targets while insisting France saw no reason for now to put its own in doubt.

Eager to forge his fiscal credibility, Hollande has promised EU partners that France will cut its public deficit to 3 percent of national output next year from an estimated 4.5 percent this year despite stagnating growth.

Many economists consider the target will be difficult to reach without further measures, judging as too optimistic the Socialist government's 2013 growth forecast of 0.8 percent on which it based next year's budget.

"For the moment we don't have any reason to think that our targets, which we set in the budget law, will not be reached," Hollande told journalists after meeting leaders of the IMF, OECD other international economic organization in Paris.

"If one day there is a discussion it won't be between one country and the (European) Commission, it will be between Europeans - but for the time being this discussion is not to be opened," Hollande said.

Hollande did not spell out what discussion was envisaged. However officials within his government are beginning to raise the idea that the weak economic outlook should be taken into account in establishing deficit targets.

In particular, some want to focus on the structural deficit, an attempt to measure the underlying trend in public finances by excluding business cycle gyrations and one-off items.

In a period of slow or stagnant growth, that would give countries more leeway than if they are made to stick to nominal deficit targets.

The EU "fiscal compact" signed by 25 EU leaders in March makes use of the structural deficit concept.

Such a proposal could find a warm welcome among the many euro zone countries already struggling to meet deficit targets that they have agreed with the European Commission as recession sets in across large swathes of the bloc.

"The adoption of a deficit reduction path corrected for the business cycle allows a member state to say they are perfectly on target while not taking extra measures to make up for the deterioration," a senior French government official said.

"So it's quite intelligent to reason in structural terms even if it is complicated," the official added.

Budget Minister Jerome Cahuzac said the structural deficit was the "right criterion" for deficit reduction, but that France would respect its pledges no matter which measure was used.

"It (France) is not asking for the structural deficit to be taken into account more quickly even if such an initiatives would be in the interests of Spain or Italy," he said in an interview with Acteurs Public magazine published on Monday.

Barclays chief European economist Philippe Gudin de Vallerin said dismal economic forecasts from the European Commission due early next month could trigger debate on easing deficit targets.

"The Commission will put the issue on the table saying, these are my forecasts and I think the targets won't be met - let's open the debate," said Gudin, a former senior official at the French Treasury.

He suggested the Commission could then come up with a formal proposal to focus deficit reduction on the structural balance, though France could not take the initiative because of the risk of losing credibility with Germany and investors.

Attempts to ease up the pace of deficit reduction would run up against opposition from Berlin, which rebuffed an International Monetary Fund call this month for more flexibility to be given to recession-hit Greece, Portugal and Spain.

(Reporting by Leigh Thomas, Additional reporting by Jean-Baptiste Vey; Editing by Ruth Pitchford)

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