France Risks EU Deficit Clash After Scrapping Targets

The French government abandoned its 2014 deficit targets after the economy unexpectedly failed to grow for a second straight quarter, risking a clash with European partners striving to meet their own fiscal goals.

Finance Minister Michel Sapin said that European policy is partly to blame for the lack of expansion in the region’s second-biggest economy. French gross domestic product stagnated in the three months through June, national statistics office Insee said today in Paris. Economists forecast a 0.1 percent gain, a Bloomberg survey showed.

Sapin’s comments will fan a debate about France’s repeated inability to meet European Union fiscal rules it helped write, with Germany advocating reforms and prudent spending to help meet deficit targets and other EU members led by Italy seeking more budgetary leeway. The European Commission has already allowed France to delay deficit targets twice in the wake of the region’s sovereign debt crisis.

“There are European causes and there are French causes for the lack of growth,” Sapin said on Europe 1 radio. “The rules allow flexibility for the situation we are facing.”

The French government now predicts full-year growth of 0.5 percent instead of 1 percent announced previously. This year’s deficit will exceed the limit of 4 percent of economic output agreed less than four months ago with the commission, the EU’s executive body.

French Underperform

Though Germany underperformed France in the second-quarter with a 0.2 percent GDP contraction, the three-month snapshot hides a much stronger economy. The Bundesbank said this week that it still expects a full-year expansion of 1.9 percent and the commission sees the German budget in balance.

“While the second-quarter weakness should remain temporary for Germany, France remains mired in stagnation due to lack of reform,” said Christian Schulz, an economist at Berenberg bank in London. “We expect France to continue to underperform the currency area as a whole.”

Sapin also said that France’s budget shortfall should be reduced at an “appropriate pace,” suggesting the deficit will exceed the 3 percent goal set for 2015. He declined to provide a current estimate for next year’s deficit when asked.

Germans Chafe

The finance minister’s remarks chafe with those of German policy makers. German Finance Minister Wolfgang Schaeuble, who has overseen a balanced budget and plans no new government debt from next year, said on July 18 that he expected France to hold to its 2015 commitment, noting that it had already benefited from deficit-reduction delays.

France should stop pleading for more support from Germany and accelerate measures to overhaul its economy, Bundesbank President Jens Weidmann said yesterday.

“France needs to set an example with its budget,” Weidmann said in an interview published in Le Monde newspaper. “Paris needs to stop asking for growth-enhancing efforts from Berlin and concentrate on its own structural reforms.”

The European Commission echoed those comments today.

“As we have consistently stressed, it is through structural reforms, adopted and effectively implemented, that the conditions will be put in place for a sustainable recovery in growth and job creation in France,” Michael Jennings, a spokesman for the EU executive arm, told reporters in Brussels.

German unhappiness aside, France’s troubles may provide an opening for Italian Prime Minister Matteo Renzi. Coping with an economy in recession and Europe’s second-largest debt load, Renzi has led a push for a flexible interpretation of the region’s deficit rules.

Renzi told the European Parliament last month that Germany needs to reflect on how it bent the deficit rules a decade ago to soften the pain of its economic adjustment.

Germany was “allowed to violate the limits” as it pursued reform policies that are powering the country’s expansion today, he said July 2 in Strasbourg.

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