EU split as France ignores euro rulebook

A political crisis over the tattered rulebook of the European single currency deepened last night as ministers argued in public over how to deal with France's persistent breaches of the euro's rules.

After failing to meet a deadline last Friday for saying how it would curb its ballooning budget deficit, Paris faced direct criticism yesterday from countries that have managed to meet their pledges.

The crisis over France's economic management has thrown into question the future of the Stability and Growth Pact - the rulebook that underpins the euro - under which Paris, in theory, faces massive fines for breaching the rules. French officials say that, to get the deficit below the required 3 per cent next year would involve cuts of €10bn (£7bn) in public spending, plunging the country into recession.

The issue has also driven a wedge between two distinct groups of nations within the 12-nation eurozone. Several countries are tacitly supporting the French, either because of the state of their own finances, or because they see this as an opportunity to reform a pact regarded as too rigid to deal with an economic downturn.

But nations that have got their public finances in order, including the Netherlands, could take France to the European Court if it fails to abide by the pact, which was written into the EU treaty and has the force of law. The Austrian Finance Minister, Karl-Heinz Grasser, one of France's harshest critics, said there was no room for compromise and France should face sanctions if it failed to bring down its deficit.

"We have to be strict. I don't see any room for any compromises without the achievement of a consolidation of the French budget going below 3 per cent. Otherwise I am for the full implementation of the pact, the excessive deficit procedure, to the point of sanctions."

Diplomats were expecting a frank exchange of views at a meeting of the 12 eurozone nations in Luxembourg last night.

The pact requires members of the single currency to keep their budget deficits below 3 per cent of gross domestic product (the total value of goods and services produced in the country in a year). Already France, Germany and Portugal have fallen foul of the rule.

Berlin and Lisbon are taking steps to rectify the situation, but the authorities in Paris have resisted pressure to rein in spending or cancel promised tax cuts. Having recorded a deficit of 3.1 per cent last year, and an estimated 4 per cent this year, France is heading for a deficit of at 3.6 per cent in 2004.

The European Commission, which is the guardian of the rulebook, is ready to move to the next stage in the European Union's excessive deficits procedure against France, by making formal and detailed recommendations on how the French deficit should be cut.

These, in turn, would have to be approved by a qualified majority of EU finance ministers.

"The whole pact would be weakened if it came to France brazening it out in the hope of getting enough support for its position in the council," said one EU diplomat. The pact gives a potential get out to the Commission, if it can negotiate a deficit-reduction strategy with Paris, because there is an exemption in the rulebook for "particular circumstances".

But views on how to proceed remained polarised yesterday.