Chirac putting euro credibility at risk, warns Commission

The European Commission issued a blunt warning last night that the credibility of the euro was at stake, after France persuaded its EU allies to postpone debate on controversial economic policy guidelines until after the French elections.

With Jacques Chirac, the French President, pledging a new round of tax cuts, there is mounting concern over the ability of the government in Paris to meet commitments designed to underpin the euro.

The simmering row is the latest test of economic guidelines designed to reinforce the euro, after EU ministers backed away from issuing a formal warning to Germany earlier this year for running up a deficit close to the maximum permitted under the currency's rules.

At issue now is the EU's proclaimed goal of achieving a balanced budget by 2004.

With an interim government in place in Paris, pending elections for the National Assembly later this month, France persuaded EU finance ministers yesterday to postpone plans to endorse a set of recommendations for each country known as the Broad Economic Policy Guidelines. But although discussion of the issue was restricted to a few minutes at the meeting in Luxembourg, there was no disguising the sensitivity of the issue.

Pedro Solbes, the European commissioner for economic and monetary affairs, argued bluntly: "We have to stick to our commitments if the entire process is to retain its credibility."

In March, European leaders agreed to bring their public finances "close to balance or in surplus" by 2004. Germany, France, Italy and Portugal, which account for three-quarters of the 12-nation euro economy, need to cut spending or raise revenue to meet their commitments to balance their budgets by 2004, the European Commission said last month.

The Commission predicts deficits this year of 2.8 per cent of gross domestic product in Germany, 1.9 per cent in France, 1.3 per cent in Italy and 2.6 per cent in Portugal.

However, Mr Chirac, who was re-elected to the French presidency on 5 May, pledged during his campaign to cut taxes by €30bn (£20bn) and to boost spending over the next five years, hinting that the budget would be balanced by 2007, three years after the target to which France has signed up.

The caretaker government he appointed a month ago will have power to implement the President's platform only if Mr Chirac's coalition wins the National Assembly elections on 9 and 16 June. That fact was enough to persuade EU finance ministers to postpone the discussion until after the poll.

The divergence of views remained stark. Francis Mer, the French Finance Minister, said he thought France "can get close" to a balanced budget in 2004 but added: "Let's not hang on to a symbolic date, a symbolic percentage; 2004 is no particular date." But Hans Eichel, the German Finance Minister, argued: "Our position is absolutely clear: 2004 will remain in the guideline."

The rift was seized on by Eurosceptics. Teresa Villiers, deputy leader of the Conservative group in the European Parliament, said: "This represents a serious blow to euro credibility with important decisions like this being postponed for political reasons."