October 13, 2014 / 5:01 PM / 3 years ago

France faces pressure from peers to tighten spending plans

LUXEMBOURG (Reuters) - France faced renewed pressure from euro zone peers on Monday to tighten spending next year, amid a growing rift over its plans to flout European budget rules.

Germany's Minister of Finance Wolfgang Schauble speaks during a discussion on "A Reform Agenda for Europe's Leaders" during the World Bank/IMF annual meetings in Washington in this October 9, 2014 file picture. REUTERS/Joshua Roberts/Files

The dispute with France, the euro zone’s second-largest economy, over its planned budget, is an added problem for the bloc, which is hamstrung by political division while its economy is slowing.

“The figures we are hearing from Paris are not very hopeful,” Jeroen Dijsselbloem, the Dutch finance minister, told reporters before chairing a meeting of euro zone finance ministers, or Eurogroup, in Luxembourg on Monday.

Euro zone countries are required to abide by European Union rules that limit a country’s budget deficit to no more than 3 percent of gross domestic product.

France, which has already been given an extra two years to meet deficit targets, announced this month that it would not bring its deficit down to within European Union limits until 2017, four years later than originally pledged, setting up a confrontation with the European Commission.

“There are certainly concerns there,” Dijsselbloem said. “It would be a good thing for Europe if we find a solution for all the budgets within the rules ... but no deals outside the pact,” he said, referring to the European budget regime.

He drew a distinction with Italy, which has also argued for some flexibility, saying there was less concern that Italy’s public finances would stray so far from EU targets.

A French government source said that there would be no changes to the French draft budget before the deadline for handing it to the European Commission on Oct.15, drawing the battle lines for the weeks ahead.

Although Paris may ultimately make some concessions, major changes to its 2015 budget would be both politically and technically difficult.

Germany’s finance minister Wolfgang Schaeuble said he was “confident” that a solution could be found in the case of France. But he also cautioned against bending the budget rules.

“The European rules are there to be stuck to,” he said.

SUSTAINABLE GROWTH

Germany, the bloc’s biggest economy, faces calls of a different nature, namely to spend more on investment.

There are signs that recent poor German economic data may be softening Chancellor Angela Merkel’s opposition to increasing public spending. Merkel says her government is exploring ways to encourage more investment in the German economy, which contracted by 0.2 percent in the second quarter and could weaken further going into 2015.

Schaeuble, however, played down the prospect of any significant increase in public spending.

“We don’t have any grounds for overdoing it in a hysterical manner,” he said. “Rather than reacting by putting big numbers on show, we do concrete projects.”

“We need sustainable growth. We need more investment, firstly in the private sector and secondly in the public sector but this must not necessarily be done with public money. It can also be privately financed.”

European Union leaders are due to discuss ways to increase investment at a summit on Oct. 34-24.

One compromise is an infrastructure investment fund of public and private money, although the first draft of a list of potential projects will not be ready until December, according to a document prepared for Monday’s Eurogroup meeting.

The euro zone’s stuttering growth and the risk of deflation are raising alarm among global policymakers who fear the bloc is again dragging on the world economy just two years after its last crisis. They say the bloc’s continued strict focus on budget rigour is misplaced.

Investment in the European Union has fallen by about 20 percent since 2008, according to the European Central Bank.

EU finance ministers are looking to a plan by the European Commission and the European Investment Bank to create a pipeline of projects to boost business and growth potential.

However, there are few details other than that ministers are eager to bring in as much private investment as possible and compliment a 300 billion euro investment programme proposed by the incoming Commission president, Jean-Claude Juncker.

A list of projects and ways to finance them will be presented in December, delaying a pledge made in Milan last month to have something ready for Monday’s Eurogroup meeting.

Additional reporting by Jean-Baptiste Vey, Francesco Guarascio and Jan Strupczewski; Editing by Catherine Evans and Susan Fenton

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