Social security deficit set-back to EMU plan

Date: 13/06/1996

By Thomas Klau

THE French government's hopes of bringing its budget deficit down to the Maastricht threshold of 3&percent; in 1997 suffered another set-back this week, with the publication of a report predicting that the social security deficit this year would be far higher than expected.

While Prime Minister Alain Juppé had planned to bring the deficit down to 2.6 billion ecu in 1996, the social security's audit commission puts the spending gap at 7.4 billion ecu this year - three times the government's original target.

Even in 1997 - the year when, under present plans, failure to meet the Maastricht convergence criteria would rule out a country's participation in the start of monetary union in 1999 - it would be “imprudent” to anticipate a return to equilibrium, the commission warns.

The main reason cited for the deficit is the sluggish performance of the French economy, which like that of most EU countries has failed to fulfil the growth expectations raised by forecasters last year.

The slump in France was made worse by a wave of strikes in December, which were largely a consequence of Juppé's austerity policy.

Paris had expected the bad news and is reportedly considering several solutions to the problem.

Most of these, however, would lead to an increase in social contributions and nonwage costs.

Such measures would come at an awkward time for the conservative government, which must fight a parliamentary election in March 1998.

While the Socialists are still recovering from the loss of presidential power last year and are not perceived as a major threat, the far-right National Front has positioned itself as vocal critic of government policy.

Paris has vowed to bring down the overall budgetary deficit, including social security, to 4&percent; this year and 3&percent; in 1997, or from roughly 49.3 billion ecu to about 30.9. But at the same time, Juppé has announced he will work to avoid an increase in social security contributions.

An alternative would be to finance the social security deficit through medium-term debt. France's state debt is well below the treaty's 60&percent; threshold, technically leaving the way open for Paris to borrow its way out of the deficit squeeze.

French compliance with the convergence criteria in 1997 is essential if the project is to start on time, as EU leaders and central bankers agree that EMU cannot begin unless both France and Germany are fit to participate.

With Germany set to miss the 60&percent; target, there is a growing consensus between Bonn and Paris that the political leeway the treaty offers should be fully exploited by opting for a looser interpretation of the criteria.