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Wednesday, February 26, 2003

France Confirms 2002 Deficit

Yesterdays confirmation that the French budget deficit exceeded the 3% limit in 2002 and will continue to exceed it in 2003, coupled with the refusal of the French government to take any specific measures to reign back the deficit can only make the controversy surrounding the growth and stability pact grow worse. Clearly one of the essential conditions for a coherent monetary policy from the ECB is a common commitment to adhere to agreed principals. For the euro to have any mid-term possibility of survival as a common currency, it is clearly necessary to find a way to steer the twelve separate economies to a position where they act, in principle, with one voice. I personally doubt this is possible (which means, I suppose, that I doubt that the euro can survive in its present form). Certainly the response of each of the national governments to the arrival of a more difficult economic climate does little to convince that this is going to happen. And to all my American friends who are so pronounced about criticising the Bush deficit at home, but seem somehow to imagine an alternative, more growth oriented policy, is readily available here in Europe where the underlying 'fundamentals' are even worse, I would add that what's sauce for the goose is also sauce for the gander, and that growth based simply on trying to borrow your way out of trouble isn't real growth at all, it's growth now at the price of bigger problems later. This, as is often noted in the Bush case, is fine by politicians who are around now, but who won't be around later to pick up the pieces. Of course 'all good men and true' (not to mention the good women) agree that you shouldn't apply dogma rigidly, and that hard times need flexible attitudes. But hard times sometimes also need hard decisions, simply borrowing money to put offf taking decisions is no answer. Borrowing money to facilitate the changes you need to make to be able to repay later would be another question. But take a hard look at what is actually on the table. Europe, like Japan, is postponing change rather than confronting demographic realities. "When growth is uncertain you do not lower spending more than necessary." Raffarin informs us. That is true enough, but when exactly is growth going to become more 'certain', this is the tricky bit.

France on Tuesday launched the most serious challenge yet to the EU's economic rules by ruling out austerity measures to plug its growing budget deficit. The French government admitted for the first time that its deficit for 2002 was likely to top the EU stability and growth pact limit of 3 per cent of gross domestic product. Jean-Pierre Raffarin, prime minister, told business leaders that it was "probable France's budget deficit exceeded 3 per cent as early as 2002". He also indicated that the deficit could remain above 3 per cent this year. However, Mr Raffarin - who heads a right-wing government haunted by memories of an unexpected defeat in 1997 after a failure to honour election promises - said there would be no austerity measures. The government last year promised to reduce taxes by 30 per cent over five years. "I won't conduct a policy of austerity," he said. "When growth is uncertain you do not lower spending more than necessary. That would depress the economic climate even further." The French response to its likely breach of the stringent economic rules underpinning the euro will test the credibility of EU economic policy. A defiant stance by France, which has recently clashed with other EU members on other issues such as Iraq and Zimbabwe, would make it easier for other countries to disregard the pact. The Commission said it would "have no choice" but to take action against the French government if the pact's breach was confirmed when final figures were submitted at the end of this week.
Source: Financial Times

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