EU pressure as France set to miss key deficit target


France is under renewed pressure to cut its budget deficit, after the European Commission forecast the euro zone's second-largest economy would miss its 2015 reduction target.

France's budget deficit is expected to stand at 3.9 percent of gross domestic product (GDP) in 2014 and 3.4 percent in 2015, above the European Union (EU)'s 3 percent target.

The EU has been lenient with France and extended its deadline to hit the deficit target two years to 2015. But France will faces fines if it doesn't meet the requirement by 2015, under recent powers granted to the European Commission, the EU's executive arm.

Francois Hollande and Manuel Valls
Chesnot | Getty Images

Last month, President Francois Hollande's newly reshuffled cabinet announced a package of reforms that aims to make 50 billion euros ($69 billion) worth of savings and will be rolled out over the next 3 years. The French government is adamant the cuts will allow the country to hit the 3 percent target and keep France competitive, when coupled with its pro-business reform package known as the "responsibility and solidarity pact".

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"The Government reaffirms its determination to implement the Responsibility and Solidarity Pact and to realise the 50 billion euros of necessary economic efforts to bring the deficit down to 3 percent of GDP in 2015 and the progression of public spending in line with inflation," the office of France's finance minister, Michel Sapin, said in a statement.

The Commission's forecast on Monday did not take into account all of the savings proposed by the French government, which could go some way to explaining the Commission's pessimism relative to France's.

"The Commission does not take into account measures which have not been voted through yet or haven't been sufficiently precise," Philippe Gudin, chief European economist at Barclays, told CNBC in a phone interview. "What is important to see is whether there are enough measures in the deficit reduction program and whether the Commission needs more clarification about the measures to see the deficit decrease."

Is France too optimistic with growth?

The Commission was positive on some aspects of France's recovery. Firms could see profit margins increase, with cuts to employer social security contributions. Employment could tick up gradually as some of the measures aimed at reducing labor costs take hold, although this is likely to be a modest gain.

After being relatively flat in 2013, France's economy is set to see 1.0 percent growth this year and 1.5 percent in 2015. This is however still below the euro zone average, so France is not out of the woods, according to analysts.

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"The whole reading for France is not great, there is a lack of coherence in France's reform approach," Raoul Ruparel, head of economic research at Open Europe, told CNBC. "They are being forced to do reforms in deficit-cutting from the EU, but they haven't embraced that fully. The reforms seem tentative."