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France can bank on EU budget leniency before polls

Paul Taylor and Ingrid Melander
Thursday, 31 Oct 2013 | 6:40 AM ET

PARIS, Oct 31 (Reuters) - Economic fragility and fear of a far-right political backlash are preventing a clash between France and the European Commission when the latter makes first use of its augmented budget supervision powers next month.

The outgoing commission is cautious in seeking more austerity its last year in office, wanting to protect what little economic recovery has been achieved and to avoid fuelling a massive anti-European vote in elections next year.

So, officials in Brussels and Paris say the French can expect a soft ride - possibly to the disappointment of hardliners in Europe who wanted a confrontation.

France is regarded by many in Brussels and northern Europe as the euro zone state most resistant to the deep open-market economic reform being demanded across the bloc.

Reflecting the concerns of many fiscal hawks, Dutch Finance Minister Jeroen Dijsselbloem, chairman of euro zone finance ministers, said this week that EU budget "leniency" should be tied more concretely to economic reforms.

He noted that France and others had been granted more time to cut their deficits without such conditions.

Some European Central Bank policymakers have also been scathing about what they see as timidity on France's part.

Socialist ministers in France, however, counter this by saying President Francois Hollande has already overhauled labour law and pensions by social consensus among trade unions and employers with barely a street protest.

Whatever the merits of the debate, EU Economic and Monetary Affairs Commissioner Olli Rehn, who for the first time has the right to send back national budgets of the 17 euro zone states for redrafting, is not planning to give Paris a hard time.

"We will not scrutinise the budgets line by line. What is of interest to us is the broad outline of the budget and the structural balance," Rehn told Reuters in an interview.

Asked if he expected any national budget to be judged out of line with European commitments, Rehn said: "No."

One reason is that France has only just emerged from recession and its progress is very fragile.

There is also no bond market pressure on Paris to cut spending or reform faster, since borrowing costs are at a historic low and France is seen as benefiting from an implicit German guarantee at the core of the euro single currency area.

But beyond this French politicians are alarmed by the rise of the far-right National Front. They have warned that the EU authorities demanding austerity could fuel extremism ahead of March municipal elections and a May European Parliament vote if they are too tough on Paris.

"There's no point in paralysing France," Trade Minister Nicole Bricq told Reuters in an interview, noting that many citizens had already lost trust in Europe.

"We have to move at the speed of the country. France is a very old country that is cracking up," she said.

Bricq said France had begun a "velvet revolution" to regain lost competitiveness by reforming tax policies, welfare and labour markets. For European critics, however, these modest changes add up to more velvet than revolution.

NEGATIVE IMPACT

EU officials acknowledge that too much external pressure could be counterproductive.

"The Commission is aware of the potential political backlash in favour of the nationalist extreme right and hard left if it squeezes the Socialist government too hard," an EU official involved in talks on the budget and reforms said.

Opinion polls show that the far-right movement led by Marine Le Pen could top the European vote, surfing on anger at Hollande and the divided main conservative opposition party, the UMP.

Close to 60 percent of voters say the European Union has a negative impact on France and fewer than 20 percent view it positively, a CSA opinion poll found.

"This is THE subject for the Commission in France," another EU official said. "People here know so little about Europe that (populists) can tell them anything they like."

The EU executive has launched a campaign to brief French journalists ahead of the European elections, visiting the heads of the main television channels and offering training to some reporters, the official said.

A second report is due later in November on French economic reforms under the fiscal compact treaty signed last year.

While the Commission is unlikely to drop calls for France to do more to open up its economy to more competition, reduce rate tape and cut the cost of labour, officials expect the 2014 budget to get green light because it reduces the underlying structural budget deficit in line with EU rules.

(Additional reporting by Jan Strupczewski in Brussels Editing by Jeremy Gaunt)