Chirac faces showdown with EU over tax cut plans

President Jacques Chirac's election promise to slash taxes has placed him on a collision course with his EU partners, who fear that a surge of red ink in French public finances may destabilise the Euro.

A series of warnings has been issued to Paris from Brussels, the German government, the Organisation for Economic Co-operation and Development (OECD) and French industry, which suspect that France is preparing to ditch its pledge to balance its budget in the next two years.

The centre-right government, which took office in early May, has already announced plans for an instant five per cent cut in income tax as a down-payment on Mr Chirac's pledge to reduce taxes by €30bn (£19bn) over five years.

With the new government also planning to increase spending on police and defence, France has, in effect, already abandoned its joint pledge with other eurozone countries to balance public budgets by 2004.

The French government said this week that it remains committed "in principle" to the balanced budget deadline, which was restated at the Barcelona summit in March. During the presidential elections, however, Mr Chirac said the target was "not imperative" and could be shifted to 2007.

The Germans and others fear that, if France lets go of the budgetary rope, their own painful efforts to control public finances will be wasted. The euro, which has been riding relatively high against the dollar, could come under market pressure, forcing up interest rates. Hans Eichel, the German finance minister, said he would not "lift a finger" to help France weaken the guidelines for public spending.

An open row between France and the 11 other eurozone countries would also damage Tony Blair's hopes of winning a referendum on British entry to the single currency next year.

It could reverse the downward trend of the pound against the euro, alarming British industry. It would also focus attention on the reduced political and fiscal autonomy of eurozone countries.

The new French government may not last very long. Parliamentary elections next month could, according to some calculations, produce a left-wing majority in the national assembly, forcing Mr Chirac to cohabit once again with a left-wing prime minister.

However, an opinion poll published in the magazine Le Point yesterday suggested the centre-right – though hampered by a resurgent far right – would win a comfortable majority in the two-round election on 9 and 16 June.

Other EU countries will then want to see evidence that the new French government – of whatever political stripe – is committed to keeping public income and expenditure in line.

For Mr Chirac, the issue carries painful memories. During his successful presidential campaign in 1995, he promised to abandon the "strong franc" policy intended to prepare France for euro membership.

Once in office, however, he did the opposite, raising taxes and trying to cut public spending to meet the euro guidelines. As a result, he lost his parliamentary majority in 1997, forcing him into five years of power-sharing with the left.

Until the elections for the national assembly are over, Mr Chirac and his new Prime Minister, Jean-Pierre Raffarin, cannot afford to even hint at any back-tracking on their promises to slash taxes. What they will do after that, if the centre-right wins, remains deliberately unclear.