Stability Pact in Crisis As France Announces 4% Deficit

by Ulrika Lomas, Tax-News.com, Brussels

03 September 2003

Despite the French Prime Minster Jean-Pierre Raffarin's protestations that his country is "entirely committed" to the EU growth and stability pact following a meeting with Commission president Romano Prodi last week, the French government notified Brussels on Monday that it expects the nation's deficit to hit 4% of GDP this year.

The news comes close on the back of an announcement by the German government that it estimates the nation's fiscal deficit to reach 3.8% this year. It is the second consecutive year that the countries have broken the 3% threshold laid down under the terms of the pact, and with both governments apparently committed to tax cuts in a desperate bid to boost economic growth, a third consecutive year above the limit is very likely. Ernst Welteke, president of the German Central Bank, confirmed as much from the German viewpoint whilst in Moscow recently. "Unfortunately we will also not be able to reach the goal next year", commented Welteke according to an FT Deutschland report.

It is the first major crisis the stability pact has seen since it was launched along with the single currency on 1st January 1999, and with little desire within the leadership circles of the eurozone's major economies to adhere to the current rules, it may well be its last in its brief existence before the likes of Schroeder and Chirac push for reform of the current rules.

Meanwhile, Swedish Prime Minister Goran Persson has delivered a stinging attack on the economic policies carried out by France, Germany and Italy in particular, accusing them of failing to adequately prepare for conversion to the euro by running deficits which have now led to the undermining of the bloc's whole economy.

"If they had behaved as Sweden, Finland, the UK and others during the 1990s, preparing their economies for the downturn, we should not have had this situation today," said Persson according to the FT.

Recommended