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The European Commission believes France should get two extra years, until 2015, to reduce its deficit, another fresh signal of a policy shift to ease austerity.a Belgium, on the other hand, risks becoming the first country fined under the new deficit rules.

"Considering the economic situation, it may be reasonable to extend the deadline by two years and correct the excessive deficit at the latest by 2015 in France," said Economic and Monetary Affairs Commissioner Olli Rehn, on 3 May, as he presented the EU executive's spring economic forecast (see box).

The two-year extension - as France was bidding only for one - came as a surprise to some in the Commission but fits, nevertheless, with EU executive chief Jose Manuel Barroso's assessment, in late April, that the EU's austerity policy has reached its limits, in particular in terms of "political and social support".

In mid-April, the French government announced plans to bring its deficit down to 2.9% of GDP in 2014 mainly by cutting expenditure.

Clearly, the Commission does not find this scenario credible.aParis' objective is based on an "overly optimistic" growth forecast, according to Rehn. Under these circumstances "a significantly larger and frontloaded effort of fiscal consolidation" would be needed, the commissioner said. Such an effort in 2014,afar greater than France has been accustomed to (around 1% of GDP in structural terms), would not be reasonable amid low growth prospects, explains an EU offical. The EU executive, which is banking on a French government deficit of 4.2% next year, decided therefore to suggest a two-year extension to go below 3% of GDP.

The leniency comes with a string attached: France has to implement urgently needed structural reforms to boost competitiveness, in particular a labour market reform with a specific focus on the product and service markets and a pension reform. Unlocking France's growth potential "is at least as important as continuing with fiscal consolidation," said Rehn.

Amongst the twenty other member states under the excessive deficit procedure (EDP) some are "evident candidates" for an exit this year (Latvia, Romania and Hungary), some likely candidates (Italy and Lithuania) and one is in line to become the first country fined (Belgium).

On the back of the recapitalisation of failing bank Dexia, Belgium was unable to reduce its deficit to below 3% of GDP as agreed with its Union partners, overshooting that objective by nearly one percentage point. Since Belgium, as opposed to France, has not produced enough structural fiscal effort since 2010, an extension of the deadline was not possible under EU rules. Under those circumstances, the Commission is likely to propose in May a fine (which can go up to 0.2% of GDP), which would then be subject to a Council decision.

Spring economic forecast

Overall, the European Commission slightly downgraded its growth projections for this year as compared to its winter forecast published in February. The EU's latest economic forecast shows that the 17-member eurozone economy will shrink by 0.4% overall in 2013 (compared to -0.3%), and the corresponding figure for the entire Union is -0.1% (compared to 0.1%). Rehn says the European economy is set to stabilise slowly in the first part of the year and then enter into positive territory in the second half of 2013 on the back of improving exports and continued weak domestic demand. Low growth is forecast for next year: 1.4% in the EU and 1.2% in the eurozone.

Recession in 2013 is projected in the eurozone in all countries under economic adjustment programmes bar Ireland - Cyprus (-8.7%), Greece (-4.2%) and Portugal (-2.3%) - as well as Spain (-1.5%), Italy (-1.3%), France (-0.1%), the Netherlands (-0.8%) and Slovenia (-2%). Only Cyprus and Slovenia will not enter into positive territory in 2014. Outside the currency block, the Czech Republic is the only country to record a slight decline in growth (-0.4%) in 2013. Germany, the EU's steam engine, is set to grow very moderately in 2013 (0.4%). As last year, the Baltic states, hard hit by the crisis in its early years, are the fastest growing economies (all at or above 3%).

The unemployment rates - projected at 12.2% in the eurozone this year and 11.1% in the EU - have reached their peak. But there are strong cross-country disparities. They stay at "an unbearably high level" (Rehn) at 27% in both Spain and Greece, while Austria posts a 4.5% unemployment rate and Germany 5.4%.

This year, government deficits are expected to fall to 2.9% of GDP in the eurozone and 3.4% in the EU. In the UK, where the deficit will be shy of 7% this year, "there is really no case for a discretionary fiscal loosening," says Rehn. General government debt in the eurozone is expected to shoot up to 95.5% in 2013 and 96% the following year, twenty six percentage points more than in 2008. In the EU, debt is set to rise to 89.8% in 2013 and 90.6% in 2014.

The economic forecast is available at
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Publication:European Report
Geographic Code:4EUFR
Date:May 6, 2013

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