Germany, France Seek Eased Euro Deficit Rule Amid Austerity

Germany and France are seeking to ease the euro area’s deficit rules to reflect efforts by governments to fix their economies, German Economy Minister Sigmar Gabriel said.

Europe’s two biggest economies will present a proposal to the next European Commission to allow countries such as France and Italy to subtract the cost of economic reforms from the budget deficit, Gabriel told reporters after meeting French Economy Minister Arnaud Montebourg in Toulouse, France, today. Austerity has “failed,” he said.

The initiative reflects pressure on French President Francois Hollande after EU authorities snubbed his plea in April for extra time to meet deficit-cutting commitments. France plans to reduce the budget gap to 3.8 percent of gross domestic product this year and to 3 percent, the limit under euro-area rules, in 2018.

“Countries that are embarking on reforms must have more time to cut their deficits, but it has to be binding -- a binding chance to reform in return for more time,” said Gabriel, the leader of the Social Democratic Party that is German Chancellor Angela Merkel’s junior coalition partner.

“This is what we intend to put up for debate in the weeks and months ahead as part of a reorganization of European policy” once the next EU Commission is in place, he said. Montebourg declined to comment on the proposal.

Mixed Message

Gabriel is engaged in a balancing act as he reaches out to help France’s socialist president while representing a German government led by Merkel, who responded to Europe’s debt crisis by demanding government austerity in return for bailouts.

“Anyone who doubts that austerity has failed should look at the election result of the right-wing parties” in European Parliament elections on May 25, Gabriel said. “No one wants higher debt, but we can only cut the deficit by slowly returning to economic growth.”

Gabriel isn’t questioning the stability and growth pact that sets deficit and debt limits for countries using the euro, Tobias Duenow, his spokesman, said in an e-mailed statement. The minister meant that countries could get more time for deficit reduction in return for pledging binding economic reforms, Duenow said.

The German Finance Ministry, headed by Merkel’s Christian Democratic ally Wolfgang Schaeuble, said it opposes diluting EU rules. “Otherwise we will squander every bit of trust,” ministry spokeswoman Nadine Kalwey said in an e-mail.

German Budget

Germany is set to run a deficit close to zero for a third straight year in 2015, the European Commission said on May 5. France will show a deficit of 3.9 percent this year and 3.4 percent in 2015, according to the Commission.

The Franco-German proposal mainly targets France and Italy, Gabriel told a separate group of reporters in Toulouse. Both countries have started reform programs, he said. Italy is set to show a 2.6 percent deficit this year and 2.2 percent in 2015, below the euro’s 3 percent limit.

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