Bundesbank President Jens Weidmann said the European Commission's decision to give France longer to prove it is serious about economic reform and fixing its excessive public deficit risks damaging the credibility of the bloc's budget rules. "I would have hoped for clearer decisions. It would be unfortunate if the impression set in that (EU budget) rules are in the end up for negotiation and that budgetary consolidation can be perpetually put off by national governments," the head of Germany's central bank told France's Le Figaro newspaper.
"France announced that it will not reach the agreed deficit goal in 2015 and has clearly put back the envisaged correction of its excessive deficit. For me, that does not strengthen the credibility of EU rules," he said. The European Commission warned France it could face sanctions if it did not implement the reforms needed to improve its public finances, competitiveness and growth prospects.
France was to bring its budget deficit below 3 percent of GDP in 2015 under an already extended deadline set by EU ministers, but its draft 2015 budget delays that to 2017. Weidmann said France needed to introduce new measures to lower labour costs and make its labour market more flexible. This week, France's government proposed a pro-growth reform bill that is crucial for avoiding EU sanctions but risks being watered down by left-wing lawmakers angry with President Francois Hollande's deregulation drive.
Fitch Ratings on Friday cut France's sovereign rating to AA from AA+ saying the country's revised deficit-reduction target was not enough to avoid a downgrade. Weidmann said when a big country like France, Italy or Germany did not honour its commitments, "we all have a problem." "It's true that Germany should do more to create growth" but "more German investments, in infrastructure for example, would have very limited consequences in the rest of the euro zone," he told Italian newspaper in the same interview also given to La Repubblica.
On the separate issue of inflation, Weidmann said lower energy prices were like "a little support programme" because they increased people's spending power and companies' profits. The European Central Bank will decide early next year whether to take fresh action to revive the euro zone economy,
but Weidmann has laid bare the entrenched German opposition to buying government bonds to do this. "There is no binding need to respond" to low inflation," he told La Repubblica. "According to our prognosis, the rate of inflation, which is very low in the euro zone at the moment, in the short term will continue to fall and then rise slowly, at the end of 2016 it will be just 1.4 percent. The board expects medium-term price rises of under 2 percent."
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