Brussels set to act after Raffarin admits deficit will breach pact
By Francesco Guerrera in Brussels and Jo Johnson in Paris
France yesterday 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.
The Brussels authorities would then formally reprimand the French government and demand measures such as spending cuts or higher taxes to bring the deficit within the pact's limits.
The Commission has repeatedly said the rules should not be relaxed in spite of the tough economic climate and the likelihood of a war in Iraq.
Germany, France and Britain -Europe's biggest economies, all struggling to contain their deficits - have proposed making the pact's rules more flexible to allow countries to run modest deficits during difficult economic times.
However, they face a fierce rearguard action from other EU members, which have voiced concerns over a general fiscal loosening, which they fear could undermine the euro.'
Germany and Portugal, the only two countries to have breached the pact so far, have -unlike France - complied with the Commission's request to rein in public spending to reduce their budgets.
Mr Raffarin also admitted French gross domestic product growth would miss the government's previous target of 2.5 per cent for this year, after reaching only 1.2 per cent in 2002 - a sign that the budget deficit could remain above 3 per cent in 2003.
Additional reporting by Martin Arnold in Paris
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