EU places France under close watch over high deficits

BRUSSELS (AFP) - The European Commission on Wednesday placed France under close surveillance over its failure to rein in its deficit, warning that its recalcitrance could hamper Europe's economic recovery.

In a searing criticism of France's public accounts, the Commission said the eurozone's second biggest economy would miss its public deficit target for 2014 and 2015.

It stressed the "need for decisive action so as to reduce the risk of adverse effects on the functioning of the French economy and of the euro area".

The high deficit and debt levels "increase France's risk of exposure to financial market turbulence which would spill over to the real economy, but also to the rest of the euro area".

France had forecast a public deficit target of 4.1 per cent for 2013, but the country's public accounts court has said that it would miss the target.

It has also projected a target of 3.6 per cent for 2014, still above the EU's three-per cent ceiling.

But the Commission said France could not meet those targets, and urged "continued fiscal consolidation and ... specific focus on spending cuts, notably through the search for efficiency gains".

Official statistics forecast French public debt will reach two trillion euros (S$3.4 trillion), or 95.1 per cent of gross domestic product by the end of this year.

In Paris, Finance Minister Pierre Moscovici and Budget Minister Bernard Cazeneuve pledged that the French government will "pursue its effort to restore public finances ... reduce public spending ... with at least 50 billion euros in savings planned for the period of 2015-2017." The Commission also sounded the alarm over a deterioration in the country's economic competitiveness, high labour costs and worsening trade balance.

"Despite measures taken to foster competitiveness, so far there is limited evidence of rebalancing," the review concluded, arguing that the decreasing profitability of private companies may have dampened their export performance.

In a sign the EU's executive was preparing to get tough with France over its economic management, the Commission announced it would make use of a new financial monitoring tool to put pressure on France to comply with recommendations.

Slovenia will also be monitored under the new rules, with the Commission adopting a recommendation specifically requesting the ailing central European country to address its public debt and weak corporate governance.

The Commission also took aim at Germany's export-dependent trade policy, saying the massive current account surplus in the EU's largest economy was placing pressure on other EU economies.

"Germany should aim to identify and implement measures that help strengthen domestic demand and the economy's growth potential," the review found, pointing to low levels of private and public sector investment as part of the problem.

The Commission has consistently called on Germany to increase domestic demand and reduce its dependence on exports, but Berlin has been reluctant to do so.

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