France wins breathing space to cut deficit

The Euro survived the latest test of its credibility yesterday when France won a compromise deal acknowledging that progress on balancing its budget would depend on continuing economic growth.

After a meeting of finance ministers in Madrid on Thursday night, the 15 member states agreed a set of economic guidelines under which France undertook to honour the rules of membership of the euro, to reduce its deficit to close to zero.

However the French Finance Minister, Francis Mer, said afterwards that this would only be possible if economic growth was at least 3 per cent. "If we don't have this growth, we will all have to accept to push things back by, who knows, one year or two years," Mr Mer told a news conference.

Earlier, the French Prime Minister, Jean-Pierre Raffarin, said France would have to make spending cuts. Mr Raffarin said: "It is clear we shall have to make economies to get the budget under control."

Although that deal was not written into a set of policy guidelines agreed by the finance ministers, it appears to have defused a looming crisis. Concern over French spending plans grew during the election campaign, which returned Jacques Chirac as President, promising to increase spending on public services, and to slash income tax. The measures are estimated to cost an extra €2.7bn (£1.7bn) this year.

Concern that France may renege on a pledge by all EU member states to get public finances in surplus or close to balance by 2004 was heightened when Mr Chirac suggested pushing the date back to 2007.

The German Chancellor, Gerhard Schröder, said last night he could live with the deal over France's budget deficit, saying Paris had never called into question the "stability pact" or rule book for euro membership. The 1997 pact limits member states' budget deficits to 3 per cent of GDP and requires them to be in or close to balance in the medium term.

But the German opposition leader, Edmund Stoiber, said Germany would not be able to deliver on its own promise to balance its budget in 2004.