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updated: 6/1/2013 2:32 PM

Merkel tells Hollande reform the price of deficit waiver

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  • France's President Francois Hollande, right, and his Panamanian counterpart Ricardo Martinelli, left, gesture at the end of a meeting Friday, at the Elysee Palace, in Paris.

      France's President Francois Hollande, right, and his Panamanian counterpart Ricardo Martinelli, left, gesture at the end of a meeting Friday, at the Elysee Palace, in Paris.
    Associated Press

  • German Chancellor Angela Merkel speaks Friday during the Annual Reception of the SOS Children's Village organization in Grimmen, northern Germany.

      German Chancellor Angela Merkel speaks Friday during the Annual Reception of the SOS Children's Village organization in Grimmen, northern Germany.

 
Bloomberg News

German Chancellor Angela Merkel pressed France to pursue an economic overhaul in return for getting more time to cut its budget deficit, a task French President Francois Hollande said nobody will dictate to him.

The leaders of Europe's two biggest economies, speaking after talks in Paris Friday, said they agreed that France has to make further efforts to match Germany's higher competitiveness. They differed on how much leeway France had to go about it.

One day after the European Commission gave France two extra years to bring its budget below the ceiling at the same time as recommending an economic revamp, Merkel said fiscal leeway must be accompanied by reform. Hollande said that while the commission was "doing its job" in making recommendations, "the measures we take, the modalities of how we do it, are the responsibility of the French government."

The differences in tone at the 45-minute news conference underscored the gap that remains between Germany and France as they attempt to forge a common position on tackling record unemployment and recession in the 17-nation euro area. The meeting at the presidential Elysee Palace in Paris was billed by both sides as aimed at reaching common ground for a June summit of European Union leaders.

Hollande and Merkel, who faces elections on Sept. 22, produced a 12-page joint statement by their two governments pledging to front-load disbursement of $7.8 billion already agreed to combat youth unemployment to provide most of the aid in 2014 and 2015.

The statement put off binding commitments on measures to boost competitiveness until EU countries have agreed on a set of benchmarks, while proposing a "full-time president" of the group of euro-area finance ministers as one step toward "stronger governance in the euro zone."

While stressing their common goals, Merkel told Hollande that the path of reform was unavoidable.

"We agreed to the commission's giving France two more years to meet the deficit target of 3 percent coupled with the expectation -- and the French president just confirmed that -- that reforms are undertaken," she said. "The two things go hand in hand."

The commission on May 28 gave recession-hit countries including France and Spain more time to lower their budget deficits, recognizing that the euro economy's longest slump and growing youth unemployment made its original targets unrealistic.

France was told to cut social-security costs for businesses in order to encourage hiring, and to boost competition in the energy and transport industries.

Fallen Behind

"I am the first to have raised the issue of how far France has fallen behind Germany in international trade," Hollande said. "Don't try to find any contradiction between what France and Germany seek on budgets and growth. There is not a confrontation between us. We share the same goals."

The Brussels-based European Commission, the EU's executive body, won't "dictate" to France, Hollande said during a visit to the south of France two days ago, prompting condemnation from German lawmakers.

"You can lower deficits much more easily when competitiveness increases at the same time," Merkel said alongside Hollande. "Competitiveness isn't an end in itself. It's a way to create more jobs, to increase exports, to make things better."

Gerhard Cromme, chairman of the supervisory board of German engineering group Siemens AG, said France should carry out its reforms how it sees fit.

"No one can doubt the commitment of Francois Hollande to carry out reforms," Cromme told reporters after the press conference in Paris. "But each country has its own way of doing things."

European Business

Cromme and Jean-Louis Beffa, the chairman of French building materials company Cie. de Saint Gobain, handed Merkel and Hollande a report yesterday on how to improve the performance of European businesses. It recommends measures to cut the cost of energy, enact more free trade pacts, reduce some regulation and allow more state aid for innovation.

German-inspired European Union rules cap deficits at 3 percent of gross domestic product, a level breached by 11 euro countries last year. The commission offered France two more years, until 2015, to reach that target. Spain was granted two years, until 2016.

Laurence Parisot, head of the French business lobby Medef, said she didn't see much of a rift between Merkel and Hollande.

"There's a huge difference between seeing them working together, where there's agreement on most issues, and then seeing them go home and addressing their electorates," she said.

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