Europe searches for a strategy after France's broken promises

Europe searches for a strategy after France's broken promises
French Finance minister Michel Sapin leaves the Elysee Palace following the weekly cabinet meeting in Paris September 10, 2014.

MILAN Italy - Euro zone finance ministers cast around on Friday for ways to revive the bloc's stagnating economy as their post-crisis strategy of budget rigour was left in tatters by France's admission it needs two more years to put its finances in order.

Investment is the new buzz word among ministers, overriding the German mantra of budget cuts, which were meant to reduce swollen public finances and win back investors. Instead, they have been blamed for suffocating the fragile economic recovery.

"Europe must put growth and employment as priorities, having focused on fiscal consolidation," Italy's economy minister, Pier Carlo Padoan, said as he arrived for the two-day meeting in Milan. "Investments are key to re-launch growth in Europe."

Italy and France have been emboldened by the European Central Bank's dramatic shift on euro zone policy. The bank has called for more government action to revive growth, including structural reforms, investment and smarter spending.

Meanwhile, the incoming president of the European Commission, Jean-Claude Juncker, wants a 300 billion-euro ($410 billion) investment programme to revive the European economy.

The euro zone's investment spending in 2013 was 15 per cent less than it was before region's debt crisis in 2010, according to a Franco-German paper that ministers will discuss in Milan.

But there are limits to what fiscal policy can achieve. Germany, backed by Austria, the Netherlands and Finland, is adamant that the bloc must not take on new debt to finance growth, fearing a return to boom-and-bust policies of the past.

"New growth is always good, but not with new debt," said Austrian Finance Minister Hans Joerg Schelling.

Those comments were largely directed at Paris, which on Wednesday announced what many had suspected for months: France will not bring down its budget deficit to below the EU's limit - 3 per cent of gross domestic product - until 2017, despite having already been granted extra time to do that by 2015.

France's admission is especially grating for ministers because French economic growth last year was actually stronger than expected by the European Commission, although no ministers publicly criticised France as they arrived for the meeting.

Paris has led calls for a more flexible interpretation of EU budget rules along with Italy, but German Chancellor Angela Merkel has rejected any bending of the rules.

"In my mind, this is the start of the debate," said Jeroen Dijsselbloem, who chairs the Eurogroup meeting of euro zone finance ministers. "The French have now to finalize their budget for next year. Then we will see where they stand and whether they have done enough to respect the pact," he said, referring to the EU's Stability and Growth Pact.

An EU country breaking budget rules can be fined.

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