France to get more time to cut deficit as euro zone recession bites

BRUSSELS Fri May 3, 2013 2:41pm BST

European Economic and Monetary Affairs Commissioner Olli Rehn presents the European Commission spring economic forecasts and outlook expectations for EU member states, including analysis of developments in countries under support programmes, during a news conference at the EU Commission headquarters in Brussels May 3, 2013. REUTERS/Yves Herman

European Economic and Monetary Affairs Commissioner Olli Rehn presents the European Commission spring economic forecasts and outlook expectations for EU member states, including analysis of developments in countries under support programmes, during a news conference at the EU Commission headquarters in Brussels May 3, 2013.

Credit: Reuters/Yves Herman

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BRUSSELS (Reuters) - France will get two more years to meet its budget deficit target because of the country's poor economic outlook within a recession-hit euro zone, the European Commission said on Friday.

Presenting economic forecasts for the next two years, Olli Rehn, the European monetary affairs commissioner, also confirmed earlier statements that Spain would get the same leeway.

Others, including the Netherlands, Slovenia and non euro-zone Poland, are likely to get a year more to get their budget gaps below the 3 percent of gross domestic product European Union ceiling. The formal decision will be announced on May 29, when the Commission will make macroeconomic recommendations.

"France badly needs to unlock its growth potential and create jobs," he said as he announced that Spain, Italy and the Netherlands as well as France - four of the euro zone's five largest economies - would remain in recession this year.

The granting of more time is a victory for French President Francois Hollande, who won elections promising a focus on growth and less on austerity but has little to show for his economic policies after a year in office.

The extra time also underlines a shift of focus in the 17 countries that share the euro from sharp fiscal consolidation in the first years of the sovereign debt crisis to economic growth, as earlier radical deficit cuts and European Central Bank action restored some market trust in euro zone finances.

EU finance ministers had given France until this year to bring down its budget shortfall below 3 percent of GDP and set the deadline for Spain for 2014. But while France expects its economy to expand by 0.1 percent this year, the European Commission forecast a 0.1 percent contraction.

"The recovery is now expected to be delayed... The French growth forecast is in our view overly optimistic," Rehn told a news conference.

France repeated on Friday it would bring the deficit below 3 percent in 2014, only one year later than the original deadline, but a finance ministry official said the extra time gave Paris leeway in case economic growth disappointed again.

GERMANY'S CAUTIOUS APPROVAL

The euro zone as a whole will shrink more than expected this year and budget deficits in most countries will therefore decline more slowly, Rehn said, as the bloc struggles in its second year of contraction and its second recession since 2009.

Of the large countries only Germany, the largest euro zone economy, will manage to eke out 0.4 percent growth, even if less than the earlier expected 0.5 percent.

It sees budget austerity as necessary to bring down bloated public accounts after a decade of credit-fuelled spending across much of Europe, even if many economists say such austerity has deepened the euro zone's recession.

Chancellor Angela Merkel's spokesman Steffen Seibert gave only cautious approval to the Commission's planned extensions, saying each country must be "checked on an individual basis".

The Commission now believes that the euro zone economy will shrink 0.4 percent this year and grow 1.2 percent next year, against projections from last February of a 0.3 percent recession and 1.4 percent growth respectively. This is roughly in line with forecasts from the European Central Bank.

"We must do whatever it takes to overcome the unemployment crisis in Europe. Fiscal consolidation is continuing, but its pace is slowing down," Rehn said, referring to the record 19 million people out of work in the euro zone in March.

The only positive surprise compared with the February forecasts was Greece, where the economy is now seen contracting 4.2 percent this year, rather than the previous 4.4 percent.

The slower consolidation will be more pronounced in Italy, which is now seen reducing its budget shortfall only to 2.9 percent of GDP this year from 3 percent in 2012, rather than to the 2.1 percent forecast in February.

Nevertheless, the European Commission is likely to end disciplinary budget steps against Rome, the so-called excessive deficit procedure, if Italy presents in the coming weeks a credible plan of keeping the shortfall below 3 percent.

Italy says it does not want an extension.

(Additional reporting by Ingrid Melander in Paris and Gareth Jones in Berlin. Editing by Jeremy Gaunt.)

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