World Economy

France Becomes EU’s Problem-Child

France Becomes EU’s Problem-ChildFrance Becomes EU’s Problem-Child

European ministers struggled to strike a balance between turning around a moribund euro zone economy with more spending and cutting bloated national budgets burdened with debt.

Eyes at a euro zone group meeting in Milan were especially on France, the bloc's second-biggest economy, which has become a European problem-child hit by high unemployment, no growth and ballooning public deficits.

The French government on Wednesday warned it would need until 2017 to work down its deficit to the EU limit of three percent of gross domestic product (GDP), the third year running Paris will ask Brussels for leniency. "This is the start of the debate, not the conclusion," said Dutch Finance Minister and Eurogroup chief Jeroen Dijsselbloem, in a cautious note before the talks began on Friday.

"France has to finalize their budget and we will see where they stand and whether they have done enough to respect the pact," he said.

France Promises

France had promised Brussels it would return to three percent next year, but French Finance Minister Michel Sapin on Wednesday said the deficit in 2015 would come in at 4.3 percent — widely off the mark.

France has spent too long "plugging holes" and "has its work cut out to explain the deficits," a European diplomat said on condition of anonymity.

The Stability and Growth pact, a strict set of EU rules, was significantly strengthened during the debt crisis in an effort by Brussels, backed by Germany, to keep member states in line and avoid the busted budgets that brought on the crisis.

But the rules are now blamed for not only bringing economic hardship to once comfortable citizens, but also causing a return to recession, with growth in the 18-country currency bloc falling to zero percent in the second quarter.

European Economic Affairs Commissioner Jyrki Katainen admitted in an op-ed on Friday that a "balancing act" would be required, softening his usual hardline on budgets.

Defending the pact, Katainen said EU overseers "will take into account economic developments and the efforts each country is making" with "fair treatment for all countries, large or small, northern or southern". But he also reiterated the Commission's firm stance that structural reforms, despite the political challenges, must be pushed through.

"Without real reforms, effectively implemented, we will not have sustainable growth and job creation," he said in a news conference after the talks.

Germany, the euro zone's most powerful country, also signaled more needed to be done to fight the stagnating economy despite its own zero-tolerance stance on public over-spending.

"We have economic conditions that demand more investment everywhere in Europe, in Germany too," German Finance Minister Wolfgang Schaeuble said.

On Saturday when ministers from all EU countries meet, Germany and France will jointly introduce a working paper providing options towards boosting investment, with Berlin urging a focus on longer-term spending on infrastructure and resea0rch.

European Central Bank chief Mario Draghi, also at the talks, said a policy mix involving monetary, fiscal and structural policies was needed "to jump-start the economic recovery in the euro area".

France, the European Union’s second-biggest economy, can’t claim special rights in its struggle to trim its budget deficit, Austrian Finance Minister Hans Joerg Schelling said.

Austria was required in 2009 to rein in its budget deficit by 2013 and exited the European Commission’s excessive deficit procedure earlier this year, Schelling said in an interview late yesterday in Milan after a meeting with his euro-area counterparts.

Next year the structural deficit is forecast to drop below 1 percent, he said, adding that it’s too early to say if this is achievable as the Russia-Ukraine conflict could affect economic growth more persistently than anticipated. Even so, the government sticks to its goal of a structurally balanced budget, which allows a shortfall of 0.5 percent of GDP, by 2016, he said.

Austria’s central bank late last month cut its growth forecast for the country for this year to 0.9 percent from 1.6 percent, citing the economic slowdown in the euro area and in particular in Germany. The Wifo institute, which compiles the Austrian government’s statistics, is scheduled to announce its updated forecast on Sept. 18.