France in firing line as EU sets economic guidelines

Struggling France will likely be the focus Wednesday when the European Commission sets down the economic and fiscal lines it expects EU member states to follow in the search for desperately needed growth and jobs. The debt crisis has seen Brussels gain additional powers to ensure EU member states toe the line -- just as well, when 20 of the 27 are under surveillance for breaching the bloc's public deficit and debt norms, at three percent and 60 percent of gross domestic product (GDP), respectively. The crisis has also forced governments into austerity mode, but soaring unemployment and popular unease are testing their resolve -- with the emphasis switching to growth now, rather than stabilising the public finances. For the Commission, this means a delicate balancing act between prudence and enforcing the rules under its "Excessive Deficit Procedure", while allowing governments the leeway they need to get their economies moving again. The Commission overall "prefers the carrot to the stick," one European source said, with Brussels favouring a constant dialogue with member states. In the case of the EU's second-largest economy, France, and Spain, which narrowly avoided a full-scale debt bailout last year, the Commission is expected to recommend they get two extra years to bring their budget deficits back within the three-percent EU ceiling. In return, they will have to commit to more economic reforms that, according to Brussels, have been put off for too long. For France, now in recession, that means further steps to liberalise its rigid labour market and reform its costly pension system, all in the name of boosting its competitive position after falling behind badly. "We have implemented competitiveness reforms and we will continue to do so, not because Europe requests us to, but because it is in the interest of France," President Francois Hollande pledged in Brussels earlier this month. Among other EU states the Commission might show some leniency are the Netherlands, otherwise known as a notorious hardliner on EU rules, and possibly Belgium, which has had trouble getting its budget deficit under control. Elsewhere, Slovenia is proving a special cause of concern as problems in its banking sector stoke speculation it may eventually need a full debt bailout. Non-euro Britain meanwhile may be encouraged to ease up on the austerity medicine after the International Monetary Fund suggested it do so in the interest of getting some growth to ease the pain. On the other side, the Commission may say some states, the most important being Italy, have done enough to bring their budgets into line and so should be allowed leave the group of countries sent to the Excessive Deficit Procedure corner. Italy is forecast to reduce its public deficit to 2.9 percent of GDP this year and 2.4 percent in 2014. However, Italy still has a massive accumulated debt ratio of 130 percent of GDP and must also account for how it plans to finance 10 billion euros ($13 billion) of new spending recently announced by new Prime Minister Enrico Letta. EU leaders are expected to discuss the Commission's recommendations at a summit at the end of June before they are formally approved later by finance ministers of the 27 EU member countries.