Economists sceptical as Paris paints a rosy picture of budget

By Stewart Fleming

Date: 29/09/05

Private-sector economists are suggesting that the French government is using over-optimistic economic assumptions to claim that it will be able to meet the EU's 3% budget deficit limit in its 2006 budget.

Dominique Barbet, eurozone economist for BNP Parisbas, the French bank, said after the presentation of the French budget on Wednesday (28 September) that he was sticking to his view that government forecasts of 2.0% growth for this year and 2.25% for 2006 are "overly optimistic". He added that, partly as a result of this, "meeting the 3% limit [in 2006] really looks impossible".

Barbet predicted that French growth would only be around 1.5% next year while the International Monetary Fund (IMF) projects growth of only 1.8%. If independent forecasters are correct, the French example will set an unfortunate precedent which others, Italy no doubt to the fore, will follow, making it harder for the European Commission to argue that the revised Stability and Growth Pact is fulfilling its role of enforcing fiscal discipline on member states. Italy is to announce its budget plans for 2006 today (29 September).

Konrad Reuss, managing director of sovereign ratings at Standard and Poors, the credit rating agency, warned that Italy could have its credit rating cut again if it fails to contain spending. S&P lowered its credit rating on Italy 14 months ago, the first cut for a eurozone country since the launch of the single currency.

The Organisation for Economic Co-operation and Development (OECD), the industrial countries official economic think-tank, predicted earlier this year that with Italy in recession in 2005 and likely to grow at best by 1.1% in 2006 its budget deficit would be 4.4% this year and 5.0% next year. How the Commission deals with Italy is seen as a key test of the new Stability and Growth Pact.

Standard and Poors has also warned that unless Germany showed clear signs of getting its budget deficit under control it would lose its triple-A credit rating and would have to pay slightly higher interest rates on its new debt. "If in the next 12-18 months we do not see a change of trend in terms of the budget and debt, then we would have cause to consider putting at least a negative outlook on its rating," Reuss said.

At the International Monetary Fund (IMF) meetings in Washington last weekend (23-24 September), EU officials made it clear that they were becoming increasingly concerned about the economic outlook. Jean-Claude Juncker, Luxembourg's prime minister and finance minister, and president of the Eurogroup, said that the Commission now expects the euro area economy to grow by only 1.2% this year and 1.3% next year.

Jean-Claude Trichet, president of the European Central Bank, told reporters that oil prices were having "a very significant impact on growth and inflation". His comments on inflation, taken together with evidence of continued rapid credit growth in the EU, are being seen by analysts as indicating that the bank is not looking to lower its interest rates in the face of the slowdown.

• Stewart Fleming is a freelance journalist based in Brussels.

Article reports that private-sector economists were suggesting that the French government was using over-optimistic economic assumptions to claim that it would be able to meet the EU's 3% budget deficit limit in its 2006 budget.