October 22, 2014 / 10:04 AM / in 3 years

France does the splits on EU economic governance

PARIS (Reuters) - France has long called for a European economic government to harmonise the bloc’s policies, but it is baulking now at that governance being applied to its own fiscal indiscipline.

French Prime Minister Manuel Valls hold a dossier during the questions to the government session at the National Assembly in Paris October 21, 2014. REUTERS/Charles Platiau

After defying European Union rules by putting forward a budget far short of the deficit cuts promised to its peers, Paris reacted angrily to the prospect of having it sent back for redrafting by the European Commission, which polices the rules.

“It is we who decide on the budget,” Prime Minister Manuel Valls declared. “Nothing today can lead to ... demands for France to review its budget. That’s not the way it happens. France should be respected. It’s a big country.”

Germany, France’s historic partner in European leadership, is pressing for the rules to be upheld but it is eager to avoid having to vote for sanctions against Paris or undercutting the EU executive’s authority by opposing them.

The issue of Europe’s economic policy mix will be on the menu when leaders of the 18-nation euro zone hold summit talks over lunch on Friday in Brussels, although any solution may take until mid-December to thrash out.

French President Francois Hollande, a Socialist supported by Italy and with much sympathy in struggling southern states, says he is trying to reorient Europe towards growth-promoting policies and away from German-driven austerity.

The International Monetary Fund, the European Central Bank and the U.S. Treasury broadly agree on the objective.

But France’s influence in Europe is diminished by its economic weakness and perceived immobility. French officials say Hollande has also shied away from confronting German Chancellor Angela Merkel on economic policy at bilateral meetings or EU summits since he took office in 2012.

SCHIZOPHRENIA

The budget dispute highlights French schizophrenia towards Europe. French leaders of the centre-left and centre-right were long a driving force behind post-war European integration, but public opinion has turned sceptical in the last decade due to unease over globalization and the EU’s eastward expansion.

France rejected a proposed EU constitution in a referendum in 2005 in which fear of the “Polish plumber” displacing French workers played a big role. Marine Le Pen’s far-right National Front has gained ground on an anti-EU, anti-euro platform.

Le Pen’s growing inroads into the left’s working class electorate - her party currently leads the mainstream centre-left and centre-right in opinion polls - help explain why Paris has struck a nationalist tone in the budget dispute.

With his approval rating languishing at a mere 13 percent, Hollande can ill afford to be seen to back down to Brussels or Berlin, or even to acknowledge the loss of full sovereignty over national budgets within the euro zone.

Hence Paris is trying to shift the focus by urging Germany, Europe’s economic powerhouse, to loosen its purse strings to stimulate a stagnant euro zone economy, while France pledges more economic reform.

The Germans, determined to balance their budget for the first time since 1969, are in no mood for a major debt-funded public works program despite international pressure.

Intensive diplomacy by EU and German officials failed to persuade the French to tighten the budget before they submitted it to Brussels on Oct. 15. In structural terms, adjusted for the business cycle, the deficit reduction is just 0.2 percentage points next year, compared to an agreed target of a 0.8 percent.

Finance Minister Michel Sapin has disputed the Commission’s right to reject national budgets and insisted Paris would neither cut public spending beyond the 20 billion euros in savings already planned in 2015, nor raise taxes.

Sapin wants two more years, until 2017, to bring borrowing down below the EU treaty limit of 3 percent of GDP, although Paris was granted a two-year extension until 2015 only last year. Economists polled by Reuters doubt it will meet even the later deadline.

TRADE-OFF

To avert a confrontation that could undermine the currency area’s fragile recovery, French and German ministers agreed this week to put forward joint proposals on Dec. 1 on structural reforms and strengthening investment.

Berlin is sceptical of Hollande’s ability to go beyond timid reforms adopted so far and take bolder steps to ease hiring and firing, cut jobless benefits and reduce the cost of the state.

“The government’s argument is that socially, we cannot ask more of the French people,” said Francois Lafond, executive director of the left-leaning EuropaNova think-tank.

“We know what reforms are needed. It’s a recalibration of the French welfare state. But the president says he cannot do more now ... So he is asking the EU and Germany for help and understanding.”

Paris wants Berlin to commit to increase public investment in roads, railways, broadband and energy networks by 50 billion euros ($63.6 billion) in the next three years to match a planned 50 billion euros in French budget savings.

“The problem is not that Germany is too strong but that France is too weak,” said French political analyst Dominique Moisi. “Our economic weakness is the result of political non-choices. We no longer feel we are playing in the same division.”

Italian Prime Minister Matteo Renzi, engaged in a more radical overhaul of labor law, politics and the legal system, warns that forcing austerity on France could drive it into the arms of the extreme right.

“I prefer to have a France with 4.4 per cent (deficit-to-GDP ratio) today than a France with Marine Le Pen tomorrow,” he told the Financial Times in an interview this month.

Such arguments carry little weight with the fiscal enforcers in Brussels, who see Paris as a repeat offender, but they resonate in government circles in Berlin.

“If France’s schizophrenia is used intelligently at the European level, it could help the EU to change direction for everyone’s benefit,” Lafond said.

Editing by Mike Peacock

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