EU discontent over French budget deal

Officials fear leaving Paris unpunished for persistently failing to curb its budget deficit may make it harder for euro to weather a future crisis.

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France, Germany and the European Commission believe leaving Paris unpunished for persistently failing to curb its budget deficit was a wise compromise that bolsters the euro, reports Reuters.

But it takes little effort to find EU officials who say it sends a signal to governments and investors that rules set to hold the common currency together are bankrupt. That, they fear, may make it harder for the euro to weather a future crisis.

"The rules are hardly comprehensible," Jens Weidmann, head of the German central bank, said last week. "And the implementation is like some political bazaar."

In Brussels this week, German chancellor Angela Merkel and Commission president Jean-Claude Juncker spoke with one voice.

France's budget was "on the right track", Merkel said, and the deal sound. But Berlin officials acknowledge politics lie behind it. To embarrass President François Hollande would fuel anti-EU rivals such as the far-right National Front.

Inside the EU executive, officials talk privately of disagreement at the top over last week's decision to grant the bloc's second largest economy a further two-year grace period to get its deficit in line with the rules.

Some speak, too, of disillusion among EU technicians who see big power politics trumping their careful analysis of French budget plans. None will speak publicly against a deal that Paris says is vital to avoid prolonging years of stagnation.

One official in Brussels told Reuters a Commission note in January on how far the regulations, known as the Stability and Growth Pact, could be bent in a recession had fatally undermined rules meant to force states to run the harmonised economic policies required in a single currency area.

"With the decision not to punish France for missing targets the Commission has now killed off the corrective functions as well," the official said of last week's decision not to impose a fine on Paris that could have been as much as 4 billion euros.

Christoph Weil, an economist at Commerzbank, agreed: "You can forget the Stability and Growth Pact," he said. "It's dead."

The euro zone has long struggled to reconcile the needs of different economies. If investors see rules intended to limit divergence are not enforced, expectations of an eventual break-up may rise.

Hollande and Italy's Matteo Renzi have pushed for a focus on growth over debt-cutting and some policymakers, such as Eurogroup head Jeroen Dijsselbloem, have been willing to discuss budgetary leeway in return for countries pursuing structural economic reforms.

Read more of this report from Reuters.

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