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Friday, 21 June, 2002, 05:37 GMT 06:37 UK
French deal opens up EU summit
Protesters in Madrid
The finance ministers met in Madrid - as protesters took to the streets for Thursday's general strike
Europe's finance ministers have cut a deal on France's demands for elbow room on its budget deficit.

The deal means the focus of the summit will return to asylum, and arguments between member states over the rights and wrongs of a common policy on refugees.

Meetings to settle the squabble over France's deficit stretched into the early hours.

The result was a compromise: while the European Union's 1997 growth and stability pact requires all countries to bring their budgets into balance by 2004, France will be exempt unless growth in both 2003 and 2004 tops 3%.

This is double the growth rate that France is forecast to have this year.

Tax cuts

The argument which led to Thursday's deal was triggered by an audit, commissioned by France's new right-wing administration, which showed the country's 2002's deficit growing to 2.5% of gross domestic product.

As well as being far in excess of the government's own 1.9% prediction, the figure is dangerously close to the 3% ceiling built into the pact. And it leaves little space for the tax cuts promised by the incoming government.

France's new finance minister made it clear that his colleagues had accepted France's arguments.

"If we don't have this growth, we will all have to accept to push things back by - who knows? - a year or two years," Francis Mer told reporters.

Damage

The pact was put in place to tame national deficits in an effort to combat inflation and build investor confidence in the new euro currency.

Portugal, which looks set to narrowly avoid breaching the 3% deficit limit this year, joined France in pushing for greater flexibility.

There were concerns that some EU countries were not doing enough to bring their budget deficits under control even before France began pressing for a relaxation of the stability pact.

Earlier this week, the European Commission said in a report that eurozone economic powerhouses France and Germany, along with Italy and Portugal, were in danger of missing the 2004 deadline.

The budget squabbles have not so far affected the euro, which rose to a two-year high against the dollar on Thursday.

ECB sounds the alarm

The prospect of a relaxation of the stability pact prompted criticism from officials at the European Central Bank, which sets monetary policy for the eurozone area independently of national governments.

An increase in European governments' budget deficits could fuel inflationary pressures, putting the ECB under added pressure push through growth-sapping interest rate increases.

Nout Wellink, a member of the ECB's interest rate-setting governing council, said on Thursday that ministers should avoid loosening the agreed spending constraints at a time when the economic downturn is subjecting them to their first real test.

"I think (proposals to relax the stability pact) are a very unfortunate development, and I hope ministers will stay away from them," he told the Reuters news agency.

"It is the first test, and at the first test you shouldn't change things," he said.

See also:

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