Fury as France defies EU by refusing to cut budget

France defied unprecedented criticism of its economic policy yesterday, insisting it would stick to spending plans attacked by the other 11 members of the single currency.

After a stormy five-hour meeting of finance ministers in Luxembourg, France's isolation was made explicit in a joint declaration that "all ministers but one" had agreed to start cutting national budgets.

Francis Mer, France's Finance Minister, remained unapologetic, saying the government in Paris – which won an election this summer on a series of spending pledges – would not start to make efforts to fall into line until 2004.

"For 2003, we decided there were other priorities in France – for example, increases in military spending," he said, pointing to the increased security worries because of 11 September. "Other countries did not make this kind of decision but we are still in a Europe where, at this stage, budget policy and policy full stop is an issue under national control."

The eurozone's rules are intended to ensure that countries do not borrow excessively, then spend much more than they earn in tax revenues, thereby weakening confidence in the single currency. With the European economy facing a severe slowdown, France has led calls for a less restrictive policy to allow countries to boost growth by spending more when times are bad.

The entire euro rulebook is now under strain. Yesterday, a statement from the 12 members said there was a "substantial risk" of Germany breaking the central stipulation of the so-called Stability and Growth Pact, that countries' budget deficits should not exceed 3 per cent of gross domestic product. "Substantial adjustment efforts" are required, it added. Italy is in economic trouble too. But France was painted as the real villain, and there were threats that it faced an official early warning, the first stage in disciplinary proceedings which can, eventually, lead to fines against countries that break the 3 per cent limit.

Karl-Heinz Grasser, Austria's Finance Minister, said: "We have to increase pressure on France and so, in my view, an early warning against France is unavoidable."

The joint statement said plans from Paris for 2003 did "not point to much of an improvement". They are also based on an assumption of 2.5 per cent financial growth next year, which is regarded by most analysts as overly optimistic. In reality, France, Europe's third-largest economy, will probably grow by about 1 per cent this year, which would be its weakest performance since the 1993 recession. The jobless rate is likely to rise by December to a two-year high of 9.3 per cent.

France has already won one highly controversial concession. Last month the European Commission came under fire for a decision to give France, Germany and Italy until 2006, an extra two years, to get their budgets in surplus or close to balance.

That ruling angered smaller countries, which say they have made sacrifices to meet the target. Several suggested yesterday that they felt France had already been let off the hook by being given the extra time. "The proposal is no great incentive for balancing the budget," Hans Hoogervorst, the Dutch Finance Minister, said.

In essence, the French have accepted the additional two years, then rejected a stipulation designed to counterbalance the concession.

The Commission called on all countries to start cutting their structural deficits – the element of the deficit that remains independent of economic ups and downs – by 0.5 per cent. Paris now says that process will not start in 2003 as it will with the other countries, but in 2004.

Although the value of the euro has not been hit significantly by the tensions, officials fear the row has the potential to deal severe damage to the pact's credibility. "It would be hard to argue that the last few weeks have been good for the Stability and Growth Pact," one EU diplomat said.

Some optimists take the contrary view that the tough statement from the 11 ministers sent a clear message to France, and to the currency markets, that the rules must be obeyed.

But the conflict has strengthened the argument for a more thorough overhaul of the Stability and Growth Pact, something demanded by Britain before it considers joining the euro.

In particular, there is growing consensus that mistakes were made around 2000, when tax revenues were buoyant, in failing to cut the deficit enough during the good times. Had such action been taken then, there would have been more room for manoeuvre during the current downturn.

Comment - Le Monde

The France of Jacques Chirac and Jean-Pierre Raffarin has become the black sheep of Europe. It is in the process of replacing Margaret Thatcher's Britain as a blocker of all common initiatives. This selfish national policy is contrary to France's 50-year long pro-European tradition.

The French government says no to reforming the common agricultural policy for electoral reasons. It says no to fish quotas for the same reason. Mr Raffarin waited nearly five months before going to Brussels. He finally made the journey 10 days ago, only to mention in effect, together with the [European Commission's] President, Romano Prodi, lowering rates of VAT for café owners. In contrast, the government is silent on important matters. We do not know its position on the work of the convention, presided over by Valery Giscard d'Estaing. We know nothing of its views on enlargement at a time when the Union will accept 10 new members at the end of 2004.

France's national selfishness revealed itself once more at the meeting of the ministers of the Eurogroup in Luxembourg. All the countries in the eurozone agreed to reduce their structural budget deficit by 0.5 per cent a year from 2003. All, with the exception of France, which postponed its efforts.