Sarkozy faces clash with eurogroup over deficit

French President Nicolas Sarkozy faces a clash with eurozone finance ministers next week over his plans to delay agreed cuts in budget deficits in a drive to jump-start the sluggish economy he inherited.
It will be the first time a head of state has met the Eurogroup to detail his economic plans, but the ministers are unlikely to be overawed, given concerns over the credibility of budget discipline rules that underpin the euro currency.
"There is concern that France might set a bad example ... which would lead to a general relaxation of the budget rules," one European Union diplomat said.
Sarkozy is expected to argue that France is entitled to more time under the revised EU rules because it will be implementing structural reforms advocated by Brussels to boost growth and make an over-rigid French economy more competitive.
But German Finance Minister Peer Steinbrueck and his counterpart from current EU president Portugal, Fernando Teixeira dos Santos, have voiced unease about Sarkozy's plan to delay balancing France's budget to 2012 from an agreed 2010.
"If it is confirmed that France is withdrawing from the so-called mid-term objectives ... then there would be a problem and not only from a German perspective but also from that of the (European) Commission and other member states," Steinbrueck said on Wednesday.
Under the EU's mid-term objectives, member states are meant to balance their budgets in good times.Finance ministers of the 13 euro zone countries, including France, agreed in writing in April to achieve that goal by the end of 2010.
But after Sarkozy was elected in May, he said France would focus first on boosting growth through tax cuts. Deficit-cutting would be less ambitious and the budget would be balanced in 2012, in time for the next presidential election.
"An agreement is an agreement and I hope the agreement will be fulfilled ... I have no doubt what the peer pressure will be," Teixeira dos Santos told reporters last week.
The European Commission is worried some countries may once again fail to reduce the shortfall in periods of expansion, leading them to breach the deficit ceiling of 3 percent of gross dometic product when the economy slows. The executive Commission, which oversees the EU's public accounts, expressed concern last week about Italy's plan to slow the pace of its deficit cuts.
Commission spokeswoman Amelia Torres has noted that under EU budget discipline rules, shortfalls should be reduced by 0.5 percent per year towards achieving balance. But the EU has no power to force countries to make such cuts as long as their deficits stay below the 3 percent level.
The rules were reformed in 2005 to put more emphasis on preventive measures rather than punitive disciplinary steps. The idea was to avoid a repetition of the situation early in this decade when France and Germany ran excessive deficits for several years but were not punished because they exerted political pressure on other member states.
Fleshing out Sarkozy's ideas, Prime Minister Francois Fillon vowed this week that public spending would be kept under tight control, but fiscal levers were needed to help growth, notably planned tax breaks on overtime, inheritance and labour costs.
Structural reforms may be taken into account as grounds to delay deficit cuts if they increase a country's potential growth and translate into future savings, Torres said, citing pension reforms as an example.