Bundesbank Tells France to Stick to Budget

Jens Weidmann
Sean Gallup
Jens Weidmann

Germany's central bank has called on France to stick to its EU-mandated budget deficit target, saying that any slippage by such a euro zone heavyweight would further undermine confidence in the bloc's fiscal discipline.

Last week France asked Brussels to give it an extra year to bring the deficit down to 3 per cent of gross domestic product, as EU projections showed the country's deepening recession would put the measure at 3.7 per cent of GDP this year.

After hints from Olli Rehn, the EU's economic chief, that he was willing to give France more time, Jens Weidmann, president of Germany's Bundesbank, entered the debate on Monday in a speech in Paris, urging the French government to stick to its commitments.

"We are faced with a crisis of confidence," Mr Weidmann told an audience at the Ecole des Hautes Etudes Commerciales, the business school where Francois Hollande, French president, studied.

"There has been a partial loss of confidence in our fiscal rules as well as in the will of European countries to consolidate their public finances." It was therefore "particularly important for the heavyweights in [the euro zone] to give clear signals, which boost the credibility of the fiscal rules and agreements," he said.

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The Bundesbank is fiercely independent of the German government, which has been more equivocal in its response to the likely French miss, although it shares the diagnosis that the sovereign debt crisis was borne of a crisis of confidence in the bloc's economic governance.

Wolfgang Schuble, finance minister, said in a newspaper interview at the weekend that "sticking to rules is important" but added it was up to the EU Commission to judge the matter.

Jorg Asmussen, a German on the European Central Bank's executive board, has also questioned whether France deserves leeway on the target. Apparently in response, Mr Schuble said: "I don't know why some people think they always need to call upon others to do things. I don't exhort the central bank to stick to its legal duties."

The French economy has come under the spotlight lately amid concern that it is doing too little to liberalize its economy. While domestic demand has held up well during the crisis and the country's demographic profile is much better than that of Germany, the dominance of the state and relative lack of competitiveness is seen as problematic.

The latter was highlighted last week when a US executive wrote to the government saying it would be "stupid" for him to invest in a French tyre plant.

Greece, Portugal and Spain have all been granted more time to hit EU budget targets under rules that are meant to prevent countries hit by unexpected shocks being forced to pile on additional austerity measures.

In his speech at the HEC, Mr Weidmann also took aim at Christine Lagarde, head of the International Monetary Fund and a former French finance minister, for suggesting that countries with a trade surplus – such as Germany – should do more to help the deficit countries in the euro zone to rebalance. Ms Lagarde, in her former post, had said "it takes two to tango".

"The attempt to shield one European country from competition by lowering the competitiveness of another makes us all weaker," Mr Weidmann said, adding that Germany's trade surplus with the euro zone had halved since 2007. "So, yes, it takes two to tango and countries with surpluses are already on the dance floor."