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EU gives France until 2017 to cut deficit; Italy, Belgium in clear

European Economic and Financial Affairs Commissioner Pierre Moscovici addresses a news conference at the EU Commission headquarters in Brussels on Feb 25, 2015.

[BRUSSELS] The European Commission gave France until 2017 to get its budget deficit below an EU-imposed limit, sparing Paris a fine and giving it a new two-year grace period after it missed a second deadline to puts its finances in order.

Co-creator of the euro and the EU's second biggest economy, France has repeatedly failed to meet pledges to cut its deficit, arguing against a German push for austerity at a time of high unemployment and struggling under Socialist President Francois Hollande to reduce spending in the face of popular opposition.

The decision by the Commission, which also decided against penalising Italy and Belgium for increasing public debts, had been expected after officials had hinted that imposing a fine on such a powerful member state was a step too far.

But it raised some questions on the credibility of rules in a euro zone already buffeted by the Greek debt crisis. "We decided to propose ... to set a new deadline for France to bring its deficit below 3 percent of GDP by 2017," Commission Vice President Valdis Dombrovskis told a news conference.

Economics Commissioner Pierre Moscovici, who was France's finance minister until less than a year ago, said Paris had begun reforms and would be given more time to meet EU rules.

In its documentation, the Commission did not give a detailed explanation of its decision, saying only that steps taken by France to bring down the deficit over the last two years were in the right direction, albeit not enough "in the current context".

EU finance ministers asked Paris in 2013, when they granted the previous two-year extension, to cut its structural deficit - a measure that excludes effects of the business cycle and one-off items - by 0.8 per cent of GDP in both 2014 and 2015.

France has said last year the structural cut in 2014 was 0.1 percent and for 2015 it planned 0.3 per cent. After pressure from the Commission it offered a cut of 0.5 per cent this year.

Because disciplinary steps against Paris are already advanced, missing the deadline and adjustment targets could have meant a fine of up to 4 billion euros (S$6.1 billion).

But none came on Wednesday. Instead, the Commission will recommend to EU leaders at their next summit in March that they accept a 0.5-per cent structural deficit cut this year and ask Paris to present a major new reform plan in April. "France has already announced several reforms in the past few days. These are steps in the right direction," Mr Moscovici said. "This should be built upon and so we expect France to present an ambitious and more detailed national reform programme in April." The Commission will review if Paris is indeed meeting the promised structural deficit adjustment in May and, were it to not deliver again, it could again face a fine.

Several euro zone policymakers, none willing to speak out in public, told Reuters the decision was bad for the credibility of EU budget rules, which were sharpened over the last three years to prevent overspending and a future sovereign debt crisis. "So its official, the fiscal rules don't mean anything," one euro zone official said after the announcement.

Since 2001, France had a deficit below 3 per cent only in 2006 and 2007 and has repeatedly missed consolidation deadlines.

Italy's and Belgium's public debt has been rising every year since 2008. For Rome it is expected to peak at 133 per cent of GDP this year and for Brussels at 106.8 per cent.

EU rules say governments must reduce their debt every year by one twentieth of the difference between 60 per cent and the current level.