Conservative French government would break 3 percent deficit pledge, worry Germany

September 15, 2016 6:41 AM EDT

Customers shop vegetables displayed in the fresh foods section at Carrefour's Bercy hypermarket in Charenton, a Paris suburb, February 8, 2013. REUTERS/Jacky Naegelen


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By Yann Le Guernigou and Michel Rose

PARIS (Reuters) - The main conservative candidates for the French presidency are all on course to break the country's pledge to bring its budget deficit below the euro zone's 3 percent limit in 2017, setting up a clash with partners - especially Germany - who resent its serial offender record.

The ruling Socialist government promised to bring down the deficit to 2.7 percent in 2017, after winning a two-year reprieve last year, escaping sanctions from the European Commission in exchange for structural reforms.

Leading center-right candidates vying for the conservative ticket in November's primaries ahead of next year's presidential elections have all pledged to put France's house in order and eventually return to a budget surplus.

But they say that if and when they take power after the election in May, they expect to find a trail of unbudgeted tax cuts and spending measures left by the Socialists that will be impossible to reverse immediately.

They also argue the spending cuts they plan to make will have to go hand-in-hand with lower taxes to kick-start a sluggish economy weighed down by one of the highest tax burdens in the euro zone.

In a confidential memo sent to center-right lawmakers and obtained by Reuters, the head of the lower house of parliament's finance committee, conservative Gilles Carrez, said he expected a deficit of around 4 percent of gross domestic product in 2017.

"The idea of a temporary increase in our deficits at the beginning of the new mandate makes economic sense," wrote Carrez, an expert on budget issues and a respected voice in parliament.

He said the apparent disconnect between the right's message of fiscal rectitude to voters and higher budget deficits in 2017 or even 2018 will have to be explained by the fact that lower taxes will have an immediate impact while spending cuts will only be felt in the medium to long term.

However, he warned France might not be able to count on rock-bottom interest rates for ever, especially if foreign debt-holders took fright.

GERMAN ALARM

The German finance ministry declined to comment on Carrez's memo, but reactions among Chancellor Angela Merkel's conservatives were swift on Thursday.

"The remarks are alarming, because they are basically an invitation to break European agreements," Ralph Brinkhaus, a senior Merkel ally and deputy parliamentary floor leader, told Reuters.

Eckhardt Rehberg, budget spokesman for Merkel's conservatives in parliament, said: "It's unfortunate that even conservatives in France are justifying budget deficits that are too high."

He added that deficit reduction and structural reform were the "only correct therapy for no longer being viewed as the 'sick man' of Europe".

Perhaps anticipating such criticism, former French Prime Minister Francois Fillon, a conservative, told Les Echos newspaper on Wednesday that foreign investors, Brussels and Berlin, the bloc's paymaster, would be more easily convinced if structural reforms were quickly passed.

"The Germans do not give us the benefit of the doubt any more and we'll need to show them evidence," he said.

"At the end of October (2017), they will be able to see that we will have reformed labour laws, sharply cut taxes, raised the pension age to 65 and reformed unemployment benefits."

REPUBLICAN MANIFESTO

The official economic manifesto of The Republicans, the main center-right party, sees France's deficit at 3.5 percent in both 2017 and 2018, before a return to a surplus in 2022.

Hervé Gaymard, the manifesto coordinator of the leading conservative in the polls, Alain Juppé, expects for his part to see the French deficit stand at between 3.4 percent and 3.7 percent next year, he is quoted as saying in Les Echos.

Former president Nicolas Sarkozy is also seeking another term in the Elysee Palace and his close supporter, former minister Eric Woerth, sees France's deficit at around 4 percent in 2017, according to Les Echos. Gaymard and Woerth did not immediately return requests for comment.

The right's plans allowed President Francois Hollande to cast himself as the guardian of fiscal orthodoxy just as he was meeting Merkel at the Elysee in Paris on Thursday. "Being bold doesn't mean giving in to budget laxity," he said.

Budget indiscipline from a new conservative government would revive memories in Brussels of when, in 2007, a newly elected Sarkozy personally flaunted recommendations to cut the deficit, promising to balance the books by 2012 instead - a pledge soon swept aside by the financial crisis.

France's deficit rose to more than 7 percent in 2009 and was last year down to 3.5 percent, the bloc's fourth-highest.

Earlier this summer, the European Commission spared Spain and Portugal from fines over their excessive budget deficits. Yet despite that leniency, it remains to be seen whether the current EU economic affairs commissioner, French Socialist Pierre Moscovici, will show the same magnanimity with political rivals.

"There can be no new delay," he said earlier this month.

(Story refiles to remove extraneous word 'of' in first paragraph.)

(Additional reporting by Sophie Louet, Simon Carraud and Jean-Baptiste Vey in Paris; Michael Nienaber in Berlin and Jan Strupczewski in Brussels; editing by Leigh Thomas and Mark Trevelyan)



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