12 March 2013

FT: Bundesbank warns Paris on deficit target

François Hollande has declared that France will significantly overshoot its budget deficit commitment this year, earning a stiff rejoinder from Germany that missing the target would be a "bad signal" for the eurozone.

The French president said the budget deficit, which he had previously pledged to reduce to 3 per cent of gross domestic product in line with EU commitments, would “probably stand at 3.7 per cent in 2013 even though we will try to make it lower".

Mr Hollande’s statement was a clear signal that Paris was not prepared to take stringent new steps to hit the 3 per cent target this year, for fear of further damaging an already stalled economy and exacerbating unemployment which has risen above 10 per cent of the workforce.

The French slippage on its public finance commitments stands in sharp contrast to Germany. Wolfgang Schäuble, German finance minister, is due on Wednesday to propose a federal government budget for 2014 with no structural deficit and a minimal net borrowing requirement. Jens Weidmann, Bundesbank president, said the reform course in France appeared “to have floundered” as it was already seeking additional leeway in meeting agreed eurozone deficit targets. “Particularly in the big countries it is important that there is a signal that the new (stability and growth pact) commitments are taken seriously”, the central bank chief said.

Mr Hollande’s socialist government has said it will seek €5 billion in extra savings on top of €10 billion in public spending cuts already promised for this year along with €20 billion in tax increases. Mr Hollande is sticking to a promise to eliminate the French nominal budget deficit in 2017. But this was based on projections of 0.8 per cent growth this year and a return to 2 per cent growth from next year, forecasts which have had to be revised sharply downwards.

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