France Refuses To Balance Budget Until 2007

by Ulrika Lomas, Tax-News.com, Brussels

17 October 2002

The French government has dug in its heels yet again over the EU's Stability and Growth Pact, pledging to stick to its election promise to cut taxes, even if the economic situation worsens.

France's Finance Minister, Francis Mer last week caused consternation at the ECOFIN meeting of European Union finance ministers by refusing to begin cutting the French budget deficit by 2003. Now, however, it has emerged that despite the extension recently granted for member states to balance their budgets, France will not achieve this until 2007, a year after the other members of the eurozone.

Mr Mer insisted that the country would not breach the 3% of GDP ceiling on borrowing laid out in the pact, but economists fear that any further deterioration in the economic situation could push the budget deficit close to the limit.

Meanwhile, the European Commission faces the thorny problem of what action to take against Portugal, which ran a deficit of 4.1% in 2001, thus breaching the terms of the Stability and Growth pact. However, given the problems currently being faced by France, Germany and Italy, the EC cannot take a strong stance against Portugal, and then a softer position against the larger member states, should they subsequently breach the ceiling.

It therefore appears likely that a fairly lenient approach will be adopted by the EC, although the country could eventually face large fines if the problem remains ongoing.

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