Why forgiveness could be France's best bet

Champs Elysees at night
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France may be locking horns with the European Union over its overspending and rule-breaking budget deficit, but analysts say the country is right to focus on growth amid an absence of any strong Europe-wide action plan.


The euro zone's second largest economy has warned its fellow EU members that its budget deficit would not come under the set limit of 3 percent of gross domestic product (GDP) until 2017 -- retreating from a commitment made to the EU in 2013 to reach the deficit target by 2015.

Over the weekend, French Economy Minister Emmanuel Macron said he was sure the European Commission, the EU's executive arm would not reject the country's draft fiscal plan, although it breaks the EU rules.

"I am totally sure at this stage that there will be no negative opinion from the Commission," he said in a joint interview with RTL radio, LCI television and Le Figaro daily. He added that he had no doubt that the Commission would not reject the draft budget.

Currently, France's budget shortfall stands at 4.4 percent but the country has said it needs to concentrate on promoting growth. The move has put it on a collision course with the EU executive and particularly Germany, a country which has promoted austerity as the best way to balance budgets.

Patrick Legland, Global Head of Research at Societe Generale, told CNBC that France was right to focus on its own growth in the absence of a concise plan to create growth from the euro zone.

"We need growth, very, very clearly so to a certain extent the French government is right to say it 'we should promote growth one way or another'," Legland told CNBC Europe's "Squawk Box" on Monday.

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"But on the other side, what we see in France is that public spending, as a percentage of GDP, which continues to go up and this percentage is among the highest in Europe."

On Sunday, the German weekly Der Spiegel said France and Germany, a fierce advocate of fiscal discipline, could be working on a deal to enable the commission to approve the budget.

However, both Macron and a German government official have denied the report. Germany has long opposed budgetary leeway for France, with Chancellor Angela Merkel commenting that Germany supported the commission in keeping up the pressure on countries to achieve "solid budgets."

France, meanwhile, has criticised Germany for not doing more to stimulate demand in the euro zone and believes this has had negative repercussions for its own economy. French gross domestic product (GDP) failed to grow during the second quarter of this year after stalling in the first, and is expected to have grown only slightly—by 0.2 percent—in the third quarter, according to the Bank of France.

Chris Scicluna, chief economist at Daiwa Capital Markets warned that, while the French authorities were right to try to moderate their fiscal consolidation plans, the country would continue to struggle.

"The country clearly has growth and competitiveness problems….As it is, even under the fiscal plans proposed by the government, we suspect that France will struggle to grow by 1 percent or more per year over coming years."

Read MoreFrance should go 'at own pace': Finance minister

Potentially making matters worse for the economy, one analyst said that leeway for France could set a dangerous precedent for the euro zone.

"[This is happening] just because France doesn't have the political will to implement reforms," Michael Hewson, chief market analyst at CMC Markets, said.

"They drew up the fiscal compact to ensure budget discipline in the euro zone so to suddenly turn around [and allow France leeway on budget requirements] suggests that there's one rule for big economies and another for everyone else."

However, Jacques Cailloux, chief European economist at Nomura, told CNBC that it would be counter-productive for France to take a more restrictive fiscal stance amid a slow-growth environment. "The biggest worry for investors is a lack of growth in Europe. I think 90 percent of investors would say 'give me pro-growth policies rather than tighter fiscal policies in countries like France."

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