UPDATE 3-France’s Sarkozy eyes German-style rules on deficit

* Sarkozy proposes deficit discipline rule for constitution

* Targets budget deficit of 6 pct of GDP in 2011

* Aims for budget deficit of 4.6 pct of GDP in 2012

* Demand for French govt bonds remains solid

(Adds further background, lawyer and analyst comment)

By Yann Le Guernigou and Sudip Kar-Gupta

PARIS, May 20 (BestGrowthStock) – French President Nicolas Sarkozy
unveiled plans on Thursday to ensure that tackling the country’s
ballooning deficit was enshrined in the French constitution,
bringing France closer to Germany’s approach on state deficits.

Sarkozy said he wanted French governments from now on to set
out five-year plans to tackle the deficit as part of a
constitutional reform. Similar to the United Kingdom, France is
determined to keep its cherished AAA credit rating.

“This reform will oblige each government coming out of an
election to engage in a five-year path dealing with the
deficit,” he told a conference, adding that governments would
need to commit to a deadline for balancing public finances.

Sarkozy’s initiative comes as euro zone governments scramble
to shore up confidence in their ability to bring public finances
back under control after a boom in spending aimed at combating
the credit crisis.

The EU has rules on budget discipline that allow it to take
legal action against countries, but in practice many have
flaunted the limits. Germany already has strict debt rules
anchored in its own national constitution.

“This is not setting out a ‘golden rule’ as in Germany but
it’s still a real engagement towards getting towards getting
balanced public budgets,” said Jean Arthuis, who heads up the
French Senate’s finance commission.

However, others felt Sarkozy was taking a clear step down
the German path to tackling public deficits.

“This is what the Germans do. In any case, the principle
behind the move is a good one,” said GSD Gestion fund manager
Christophe Gautier.

Paris lawyer Caroline Wassermann said that since the EU
already has legal mechanisms in place for tackling deficits,
Sarkozy’s announcement was essentially a public relations
exercise to show his commitment to cut the French deficit.

“Lawyers know that such a constitutional reform would be
redundant given the existing European rules,” she said.

STICKING TO DEFICIT TARGETS

The Greek debt crisis, which has threatened to spill over
into neighbouring countries such as Spain and Portugal, has
pushed the issue of public finances to the fore across Europe
and driven the euro lower.

France has forecast the deficit to come in at 8 percent of
GDP this year and aims to bring it down to within the European
Union’s 3 percent limit by 2013. Sarkozy reiterated Paris would
aim for a shortfall of 6 percent and 4.6 percent respectively in
2011 and 2012.

In an effort to keep a lid on the budget deficit, France has
said it will freeze all spending, bar pensions and interest
payments, between 2011-2013 and cut state operating costs by 10
percent over the same period.

Sarkozy promised he would lay out further plans for economic
reforms before the summer but some analysts said more details
were needed before they could fully assess how effective the
deficit-cutting programme would be.

“We still need precise measures in order to have a real
austerity plan,” said BNP Paribas senior economist Dominique
Barbet.

Sarkozy has also highlighted a reform of the country’s
costly pension system as another step towards cutting the
deficit.

The French government, which is moving towards increasing
the retirement age beyond the current 60 years, says the pension
system risks having a deficit of 100 billion euros a year by
2050 unless action is taken quickly.

Yet despite the French economic uncertainty, investors’
demands for French bonds has remained solid.

On Thursday, France sold 7.96 billion euros of shorter-and
medium-term conventional BTAN bonds and later issued a further
2.7 billion euros of inflation-proof securities.

In both cases, the sales were close to target ceilings set
by the French Treasury [ID:nTAR01176] [ID:nTAR01180].

One of the French bonds sold, the five-year BTAN, saw bids
more than five times the amount allocated – a bid/cover ratio
rarely seen since the global credit crisis began in August 2007.

Investing Research

(Additional reporting by George Matlock and Emmanuel Jarry;
editing by Patrick Graham)

UPDATE 3-France’s Sarkozy eyes German-style rules on deficit