France will miss its deficit goal next year without additional spending cuts and tax reforms, the European Commission said on Wednesday, sending a message to new French President Francois Hollande that his growth agenda faces severe constraints.
Hollande wants to shift Europe's strategy towards growth and ease the pace of German-led austerity some economists blame for suffocating national economies, but France's ability to meet its goals is crucial to the euro zone's credibility with investors.
France is supposed to cut its budget deficit to 3 percent of gross domestic product in 2013, but the Commission's latest forecasts suggest it will be some way off that goal, with a shortfall of 4.2 percent, down from 4.4 percent in 2012.
Economists polled by Reuters think next year's deficit could actually rise to 4.6 percent.
"The distance to the 3 percent of GDP threshold remains significant," the Commission said in its annual assessment of France's economic performance, saying budget consolidation was one of France's biggest policy challenges. "Correcting the excessive deficit by 2013 may require additional efforts."
"The French authorities need to specify the measures necessary to ensure that the excessive deficit is corrected by 2013," it added.
France is the euro zone's second largest economy and, along with Germany, central to European integration and the EU's global standing. Any suggestion that it is plagued by economic difficulties like those of indebted Spain, Greece and Ireland could complicate efforts to resolve the euro zone debt crisis.
"The high level of public debt poses a threat to the sustainability of public finances, and the recent rise in bond spreads suggests that markets are concerned about the country's fiscal position," the Commission report said.
NO SPENDING SPLURGE
Hollande says he has inherited worse-than-expected public finances from his conservative predecessor Nicholas Sarkozy and has ordered an audit of the state accounts for the end of June.
But even if the audit were to confirm current forecasts, the Commission said France would need to limit spending increases, keeping these under the level of economic growth, which the EU's executive sees at 0.5 percent this year and 1.3 percent in 2013.
That would squeeze Hollande's campaign promises to hire 60,000 school staff and create 150,000 state-aided jobs in a country with one of the world's highest levels of public spending.
EU Economic and Monetary Affairs Commissioner Olli Rehn said he expected Hollande to announce new measures to tackle the deficit once the audit was complete.
"It is… important for France to take effective action in order to meet its fiscal targets to bring the fiscal deficit to below three percent. It is fully achievable," Rehn told a news conference.
"I expect that France will, shortly following the review conducted by the Cour des Comptes, present concrete measures in order to ensure it respects its commitments," Rehn said, referring to the French court of auditors.
With the Commission's growth forecasts below those of the French authorities for next year, the report said such measures should be cuts in government spending and tax reforms.
"In terms of fiscal revenue, the number and cost of tax expenditures is to be further reduced," the Commission report said. "Moreover, despite measures to reduce taxes on labour, further efforts are needed to develop a tax system that is more conducive to sustainable economic growth."
