Ecofin summit waits to hear France explain budget stance

Ministers at the Ecofin summit in Madrid on Thursday will be eager to hear French Finance Minister Mr Francis Mer explain how the new government can keep France's word to voters and to its European partners. As recently as the European summit in Barcelona in March, President Jacques Chirac reconfirmed France's commitment to balance its budget by the end of 2004, as required by the stability pact. However, during his campaign for re-election as president, Mr Chirac angered his European colleagues by sayin

Mr Chirac's campaign promises are the chief obstacle to a balanced budget. Next month, the new National Assembly will vote on a €6 billion crime-fighting package at the same time as it grants a 5 per cent reduction on this year's income tax payments.

French income tax is to decrease by 30 per cent over five years; this summer's give-back alone will cost €2.7 billion.

Earlier this month, Prime Minister Mr Jean-Pierre Raffarin resolved a seven-month long doctors' strike with a pay rise that will cost at least €250 million. Already, other medical personnel are making similar demands. And Mr Chirac promised to reduce social charges and tax on businesses as well.

The last socialist finance minister, Mr Laurent Fabius, announced in February that this year's budget deficit would surpass the 1.9 per cent - €30.45 billion - that he had predicted.

Mr Raffarin has evaded questions about France's European commitments by saying he must wait for the results of an audit of government finances, which is due by June 30th.

The deficit had already reached €32.25 billioby the end of April, and could approach €40 billion for the year. Slower-than-expected economic growth and unplanned spending for social security and unemployment insurance are the causes.

"When we see the results of the audit, I shall take the necessary measures," Mr Raffarin promised earlier this month.

"France will respect its European commitments, and that is why I want to reduce our public deficits as quickly as possible."

In Luxembourg on June 4th, Mr Mer refused to comment on France's predicament before the elections were over. Soon after, he said the stability pact was "not engraved in stone". Then, at the G7 meeting at Halifax last weekend, the French minister said that "France will respect the objectives like everyone else".

The right-wing newspaper Le Figaro yesterday predicted Mr Chirac would say something similar at the EU Council in Seville on Friday and Saturday.

With the EU Commission and the Spanish presidency insisting there could be no exceptions, he could hardly do otherwise.

There is only one way France can hope to reach the 2004 stability pact deadline, and that is to privatise some of the €70 billion worth of companies still belonging to the French state.

EU rules do not allow privatisation proceeds to be directly applied to deficit reduction, but they can reduce the national debt - and debt servicing - or be used to increase capital in other state-owned companies.

In months to come, Paris faces billions of euro in bills for the railway network, the establishment that manages the Crédit Lyonnais' losses and Charbonnages de France. The aircraft engine manufacturer Snecma is reportedly first on the list of industries to be privatised.

The state's 56 per cent holding in Air France, France Télécom and Crédit Lyonnais are also possibilities, but their low share prices are a disincentive.

The chairmen of the EDF and GDF electricity and gas companies would agree to their privatisation, but the communist CGT trade union would seize the pretext for industrial action - an unpalatable prospect for a government just taking office.

EU ministers and officials pointed to a possible way out of the row with France over respect for the Stability and Growth Pact. Luxembourg Prime Minister Mr Jean-Claude Juncker and a German official insisted separately EU states stick to a goal of getting budget deficits close to balance by 2004, but suggested this could be conditional on growth forecasts being met.