Small EU nations round on France

Smaller European Union nations and central bankers told France yesterday to respect rules limiting budget deficits, or risk creating trouble for a pact that underpins the euro.

The Netherlands and Austria led the charge against Paris as European finance ministers gathered in Italy, saying they were in no mood for a compromise allowing France to escape fines for breaking the rules of the EU's Stability and Growth Pact.

Dutch Finance Minister Gerrit Zalm said the very Maastricht Treaty which set up European monetary union was at stake.

"We gave up the sovereignty on our currency for a very good treaty. If this treaty is not applied, we would be in big trouble," he told reporters on arriving for the meeting in the northern lakeside resort of Stresa.

European central bankers also warned that the row strikes at the heart of monetary union with ECB Executive Board Member Otmar Issing called it a matter of "utmost concern."

France has angered EU colleagues, provoking one of the worst crises in at least five years for the economic and monetary union by repeatedly flouting EU rules to keep deficits below three per cent of gross domestic product - the fiscal underpinning for the euro currency.

Germany is also breaking the pact but is working to get its budget back in line. European Monetary Affairs Commissioner Pedro Solbes took a tough line with Paris. France must honour its commitments and go further than the 0.5 percent annual cuts to the large hole in its public finances, or structural deficit, he said yesterday.

"What we know is that France will have to do clearly more," Solbes said.

France expects to violate the budget pact until 2006 and is proceeding with tax cuts to stimulate growth. It is proposing cuts in its underlying structural deficit, which strips out economic swings.

Finance ministers were scouring for ways to avoid a showdown with the second biggest country in the monetary union and to save face for the pact. Belgium Finance Minister Didier Reynders said he and his EU peers were looking for a clear commitment that France balance its budget over time and an outline how it would do it.

Luxembourg's Jean-Claude Junker, who is prime minister and finance minister, also held out hope for compromise. He stressed that as a close neighbour of France, he has a close interest in the outcome. "I do not like Dutch drama," he said.

But Zalm held firm. "I'm not in the mood for a discussion about compromising," said the Dutch finance minister, whose country is threatening to go to court to get the pact enforced.

The outcome is being closely followed by Sweden, which holds referendum on Sunday on whether to join the euro currency. Its finance minister Bosse Ringholm, attending session yesterday, said France's recalcitrance is having a negative effect on the Yes campaign, already struggling to secure victory.

Smaller EU countries which battled mightily through economic hard times to get their fiscal house in order to join monetary union are particularly concerned. It would also set an unhappy precedent for 10 new countries preparing to join the EU.

Austria's Finance Minister Karl-Heinz Grasser called France's action "a very clear signal for alarm" and a threat to monetary union. Finland said it would back the European Commission's strict line.

On the table at the meeting is a proposal to declare that France faces "special circumstances" so it can escape huge fines, if it promises to behave better in future and presses on with deep economic reforms - a deal that would also could help Germany, which is running larger and larger budget deficits.

"We will discuss what the situation after three years of stagnation means" for the budget pact, German Finance Minister Hans Eichel told reporters before the start of meetings.

European Commission President Romano Prodi tried to damp down expectations of any major decisions.

"We will discuss and meditate on the problem," he said. "Today there are no decisions."