Germany eyes EU budget ploy that could help France

Euro zone finance ministers discussed yesterday whether France should be pressed to make greater efforts to rein in its budget deficit as Germany mulled a future softly-softly approach to enforcing EU budget rules.

The European Commission, guardian of the rules, has given France an extra year, until 2005, to rein in its deficit.

But it wants EU finance ministers to tell Paris to cut its underlying deficit by one percentage point of France's output - more than the 0.6 per cent planned in its 2004 budget.

Some smaller member states have been strident in demands that pressure be put on France to comply fully with the rules.

"It (the Commission's proposal) is insufficient, it is quite clear the French deficit should go below three per cent next year," Dutch Finance Minister Gerrit Zalm said on his way into the meeting of euro zone finance ministers.

Austrian Finance Minister Karl-Heinz Grasser said there was a risk of interest rate rises if stability was not maintained in EU public finances.

Still, there are signs France is prepared to do more to rein in its deficit than planned to date.

"We are getting indications (of this) and the French are constructively involved in discussing measures they are willing to take," said European Commission economic affairs spokesman Gerassimos Thomas, declining to be more specific.

Luxembourg Prime Minister Jean-Claude Juncker, who has backed the Commission decision to extend the deadline for France, said care needed to be taken in getting economic heavyweights make budget cuts due to the economic consequences.

The ministers look set to delay a vote on whether to tell France to do more to slash its budget deficit until their next meeting in late November.

"There are two decisions to be taken. In the first place, whether France has lived up to earlier recommendations, that we could do now. Secondly is what will come next? That is something that we could do later," Zalm said.

Meanwhile, EU sources said Germany was considering ways to turn the clock back in the budget process against France to avoid stricter Brussels supervision of its own fiscal policy.

It came up with legal advice saying ministers can revert to an earlier stage of the process instead of escalating matters against repeat offenders, such as Germany and France.

Any such move would effectively draw the fangs of the already weakened Stability and Growth Pact on budget discipline which Germany had insisted on before the 1999 launch of the euro to protect itself against other countries' profligacy.

German Finance Minister Hans Eichel said the aim was to avoid punishing countries cooperating with the Commission.

"We think that if there is a decision taken by consensus, i.e. taken with the partner that is cooperative and we are agreeing about what to do, then you don't need procedural steps that would spark a fight again," Eichel told reporters.

"You need those procedures if a member state is not cooperative," he added. Berlin could benefit later from such an idea as it also faces censure from Brussels in the coming month for plans to exceed three percent deficit of GDP limit.

However, the Commission made it clear it would not short-circuit the budget discipline process, whose ultimate sanction is a fine.

"It is clear the different elements in the article are applied successively... and therefore this is the way we intend to move forward and apply the treaty," Commission spokesman Thomas said earlier yesterday.

If Germany got its way, EU finance ministers would never issue the sort of detailed budget recommendations that ministers will discuss this week for France and vote on later this month.

It would also avoid countries, which have exceeded the deficit limit and not followed orders to correct this, from submitting to regular assessments of their budget policy.

"Some people say that sort of thing would be hara-kiri of national budget policy," said one EU diplomat.