IMF, EU push for less drastic deficit cuts

The International Monetary Fund and European Commission officials have encouraged France and its eurozone partners not to fixate on deficit reduction targets if it would exacerbate the bloc's debt crisis.

The head of an IMF mission in France, Edward Gardner, urged officials in Paris last week to consider their 2013 budget targets "in a broader European context."

The IMF and the EU Commission expect the French public deficit to amount to 3.5 percent of gross domestic product (GDP) next year.

They do not believe France can reach its 3.0 percent goal, the eurozone limit, without additional measures that could aggravate an already tenuous economic situation.

"The credibility of the medium term orientation policy" was more important than a specific deficit target, Gardner told reporters.

Loosening the criteria would "be more effective, more credible in a coordinated fashion" across the 17-nation eurozone, he suggested.

In Portugal the public deficit fell at the end of the third quarter to 5.6 percent of GDP from 6.7 percent at the same point a year earlier, while neighbouring Spain has promised to slash its deficit to 3.0 percent by 2014 from a blowout shortfall equal to 9.4 percent of output last year.

Germany expects its budget to be in balance this year, two years ahead of schedule, but IMF head Christine Lagarde has suggested that Berlin ease up a bit in its drive for healthy finances.

"Germany ... and others ... can allow themselves to go a little more slowly than others in the push to straighten out their public finances," Lagarde told the German weekly Die Zeit in comments published last week.

Her call echoed other European voices that are now arguing for greater emphasis on growth rather than austerity measures.

"The IMF is beginning to understand that the French situation has become dangerous," economist Marc Touati at the ACDefi consulting group said. Unemployment is climbing and the economy is still struggling, he pointed out.

The IMF was "trying to prepare public opinion" for missed government targets, Touati suggested.

"This is not really a new position," Frederique Cerisier at the French bank BNP Paribas said of Lagarde's recent remarks. She acknowledged however that some international institutions were "placing added emphasis" on the need to cut deficits more gradually.

On Tuesday, the EU's 'fiscal compact,' a hard-won step towards tighter economic coordination agreed as part of efforts to tame the debilitating debt crisis, takes effect.

Finalised in March, 25 of the 27 EU member states accepted a 'balanced budget rule' in the compact to ensure that governments would no longer run the massive budget deficits which drove the debt crisis and nearly sank the euro.

But as the European debt crisis drags on and economies flounder, the idea of allowing governments more time to straighten out their finances has gained ground.

European Economic Affairs Commissioner Ollie Rehn said last week that France needed more reforms rather than more austerity.

"Once you have a credible medium-term budget strategy, backed up by reforms, you can have a slower adjustment," he told French daily Le Monde.

If a 3.0-percent French deficit remains a valid reference, "what needs to be taken into account above all is the structural budget adjustment effort which France is making with remarkable intensity," the EU official said.

French officials nevertheless seem determined to stick by their targets. They insist that the public deficit will be brought down to 3.0 percent of GDP next year from 4.5 percent in 2012, based on a 2013 growth estimate of 0.8 percent that economists consider overly optimistic.

Friday's third-quarter growth figures gave them little comfort: official statistics revised growth over that period down from 0.2 to 0.1 percent.

French Finance Minister Pierre Moscovici wrote in the German business daily Handelsblatt that France had a duty to reverse years of budget deficits.

"In the past 30 years, France has not been able to pass a balanced budget. State debt rose to an unacceptable 1.7 trillion euros ($2.2 trillion) in 2011. It is our duty to reverse this," Moscovici said.

On Friday he reaffirmed the goverment's 2013 growth target.

Cerisier at BNP Paribas warned that France, which is now benefitting from exceptionally low borrowing rates, must be careful how it communicates to markets, if it wants to maintain its credibility.

But, she added: "The fact that we can begin to discuss all that is proof that countries have become more credible with respect to their economic targets."

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