The European Commission will have "no choice" but to propose punitive action if the French government continues to run an excessive budget deficit, Mr Romano Prodi, European Commission President, told French Prime Minister Mr Jean Pierre Raffarin yesterday.
Mr Raffarin's visit to the European Commission in Brussels coincided with news that the government in Paris expects its budget deficit for 2003 to be worse than the previously forecast 3.6 per cent of gross domestic product (GDP).
The French finance ministry also expects that the deficit in 2004 will remain above the 3 per cent ceiling laid down in the European Union's Stability and Growth Pact. That would mean that France had breached the ceiling for three consecutive years which, under the terms of the pact, could intensify punitive action.
Speaking after his meeting, Mr Raffarin explained that France had suffered from "a difficult budgetary situation" in the first half of 2003. Growth had gone down in the second quarter, which in turn had hit tax revenues, he said. "If there is a deficit above and beyond what we expected, it is to a great extent caused by low tax returns," he said. "It is for that reason that I am persevering with the French government's objective of reducing the structural deficit."
The underlying, or structural, deficit is the budget deficit adjusted to take account of the economic cycle. Mr Raffarin said his government would continue its reforms to public spending.
Mr Prodi appeared sympathetic and urged Mr Raffarin to keep economic reform at the top of the government's agenda. But he made clear that the Commission could not ignore France's continued breach of the pact.
He said that he had long favoured "maximum available flexibility" in the application of the rules but warned that flexibility was "a two-way street".
In theory, France could be required to pay a deposit equal to 0.2 per cent of GDP, plus an additional amount depending on how much the budget deficit is above 3 per cent. The deposit shall, "as a rule", be converted into a fine if the deficit remains uncorrected.
Meanwhile, Germany's national debt for 2003 is likely to be higher than the expected 3.8 per cent of GDP, according to media reports yesterday.
German Finance Minister Mr Hans Eichel will send this forecast to Brussels on Monday, according to Spiegel Online. The finance ministry dismissed the report as "pure speculation".
Last month the government was predicting a deficit of 3.5 per cent but higher-than-expected social welfare bills have pushed up the deficit to 3.8 per cent, well over the 3 per cent ceiling in the Stability and Growth Pact.
