ECONOMY

French deficit strains

BRUSSELS – France’s budget deficit may exceed the European Union’s ceiling this year while Germany is on track to lower its shortfall to below the EU limit in 2007, a European Commission study showed. In a confidential note, discussed by the EU executive this week and obtained by Reuters, Monetary Affairs Commissioner Joaquin Almunia predicted slight fiscal tightening in the euro area next year despite a small slowdown in economic growth. France, the area’s second-biggest economy, may see its budget deficit rise to above the EU’s cap of 3 percent of gross domestic product in 2006 from 2.9 percent last year, despite the Paris government’s assurance that it will not. Almunia also expressed concerns about Italy and Portugal. The note said about France: «There are large uncertainties surrounding the deficit forecasts, and a non-negligible risk that even in 2006 the outcome could be above the 3 percent deficit threshold.» The Commission will therefore wait for clear evidence that France’s fiscal correction is sustainable before it recommends ending the budget discipline procedure against Paris. The procedure, part of the EU’s Stability and Growth Pact meant to underpin the euro currency, can theoretically lead to huge fines on budget sinners, but the EU has never applied them. Twelve of the EU’s 25 member states are currently subject to some stage of budget disciplinary action. The Commission said Germany, the EU’s biggest economy, should be able to lower its excessive deficit to below 3 percent of GDP by the end of next year after the government announced a hike in value-added tax and other measures. «Action taken so far seems sufficient to ensure adequate progress towards the correction of the excessive deficit according to… recommendations,» the paper said. The note said Italy’s ability to meet its obligation to cut the deficit below 3 percent of GDP in 2007 depended on the determination of the country’s new center-left government. «In the coming months, close monitoring by the Commission… will be necessary to decide whether a stepping up of excessive deficit procedure may be required,» it said. It also said the Commission saw no reason to step up the procedure against Greece at present, but it expected the country to secure «through 2007 a permanent correction of the excessive budget deficit» after this year’s one-off measures expire. Portugal’s target to slash its deficit to beneath the EU’s cap in 2008 is subject to risks as is the country’s ability to meet its obligation of reducing the gap by 1.5 percentage points this year, it added. The Commission will publish an official report on June 22 on how to proceed with the disciplinary procedure against Portugal. EU newcomer Hungary, which has the biggest budget deficit in the bloc, may still be able to correct that gap by the end-2008 deadline although this could be very difficult, it said. The Commission’s note recalled that Hungary’s newly elected Social Democratic government had until September to submit a credible deficit-cutting program to the EU. The Commission is also expected to recommend ending the EU’s budget discipline procedure against Cyprus on June 22 after the Mediterranean island has brought its public finances in order.