Oct 15, 2014 9:24 AM

France risks humiliating 'fail' in EU budget test

The Associated Press

PARIS (AP) Pencils down, papers over.

France finds itself in the uncomfortable position of a student at the end of exams as it hands in its 2015 budget plans to European Union authorities for review.

Wednesday's deadline for the bloc's 28 states to submit their budgets opens up a two-week window during which France and a few other countries who know they've missed key deficit targets must wait and hope for leniency, or be forced into a humiliating redo.

It's a process that risks either embarrassing states like France, Europe's second-largest economy, or making a mockery of the EU's new debt rules meant to avoid a repeat of the debt crisis.

France's Socialist government admitted last month that its 2015 budget would shred promises made only months earlier to bring the deficit below the EU limit of 3 percent of GDP within two years and that its 2014 deficit would actually increase rather than come down, as promised in the Spring.

Although some other EU countries also have deficits and debts exceeding the limits, they expect them to decline. France's decision to go against the grain by allowing the deficit to increase is meant to spare the economy more spending cuts, which can hurt economic growth at a time of high unemployment.

The government is already making 50 billion euros ($63 billion) in spending cuts and tax decreases for 2015-2017.

This time, it's far from certain Brussels authorities will be willing to give France a pass. Neither are France's EU partners in a forgiving mood several of them experienced devastating recessions over the past five years as a consequence of the painful reforms and spending cuts that were needed to reduce debt.

The EU has until the end of the month to review and, if necessary, send the budgets back for revision. That would be embarrassing for unpopular French president Francois Hollande. It could also add fuel to simmering anti-EU sentiment that's being stoked by France's far-right National Front party, whose leader Marine Le Pen topped a poll last month of voting intentions for the 2017 presidential election.

In theory, the EU could fine France up to 0.2 percent of its GDP for its repeated failure to respect rules intended to safeguard Europe's common currency. A more likely scenario would see the EU grant France a new delay in exchange for new measures beyond the cuts France has already agreed to.

The reckoning comes as France's debt rating has come under scrutiny by ratings agencies Fitch and Standard & Poor's both agencies this month warned of possible downgrades. The agencies cited France's repeated inability to stick to its own targets, much less those imposed by the EU.

France's government blames weak growth and low inflation for its repeated failure to meet its EU deficit commitments. It hopes to convince EU authorities that their rules should only be enforced if economic conditions permit.

The EU is putting its own reputation on the line. It agreed on the budget reviews in order to keep member states from building up huge debts of the kind that plunged the region into a debt crisis five years ago.

EU Economics Commissioner Jyrki Katainen this week suggested it was necessary to hold France and other countries accountable for their budgets.

"Our common economic governance framework is a sign of our responsibility to each other," Katainen said. "It is the Commission's job to ensure that this framework is upheld and that all member states are treated equally. It's a question of fairness and of credibility."

Ireland, Greece and Portugal are among the eurozone countries least likely to want to cut France some slack.

This week Ireland unveiled its first expansive budget after six years of austerity that saw the country slash spending worth nearly a quarter of the economy. After all that, Ireland forecasts its deficit will fall to 2.7 percent of GDP in 2015, within the limits.

Portugal, meanwhile, is expected Wednesday to extend its own austerity measures into next year to be able to bring the deficit to 2.7 percent as well.

France, by contrast, expects its deficit to not get below 3 percent before 2017 a full decade after it last was below the limit. It forecasts the deficit to rise to 4.4 percent this year and 4.3 percent in 2015.

Italy is another country in the EU's sights.

Though the Italian budget will respect the 3 percent limit, it will delay balancing the budget until 2017.

Premier Matteo Renzi has made clear he thinks more flexibility should be allowed on the deficit limit, but that Italy, to gain credibility, must abide by the rules. Moody's has given the budget a nod, saying it is solid and will help Italy to have more time to reform its economy.

The measures includes cuts to administrative spending, higher taxes on gambling and anti-tax evasion measures to recoup resources to cut 18 billion euros in taxes, social spending and restore funding for local public works projects.


Colleen Barry in Milan contributed to this report.


Follow Greg Keller on Twitter at https://twitter.com/Greg_Keller


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