EU on collision course with France: sources

(BRUSSELS) - The European Commission was on a collision course with France on Monday, with a major row brewing over when Paris will have to rein in spending.

Sources said the commission on Wednesday will order France to shoehorn its bloated public deficit back to within three percent of gross domestic product by 2013, one year earlier than Paris has offered.

Under European Union regulations, member states are bound to hold their annual public deficits to three percent of output.

France, which was told in April it would get until 2012 to put its house back in order, is one of four EU states to be given one-year extensions because of a "deterioration in the economy."

But Britain is to be given until 2015 to fix its annual budget, with Ireland allowed until 2014. Spain and Germany, a newcomer to the club, will also be given until 2013 to comply.

The 2013 French deadline puts Prime Minister Francois Fillon in a pickle, after he said last week that EU rules -- bent out of all recognition during the financial crisis -- would be applied once again nationally in 2014.

In the French budget for 2010, the government had anticipated bringing its public deficit down from the record 8.5 percent of GDP expected next year to five percent in 2013.

"France cannot agree" with the commission's new demands, submitted in a report by the EU's budgetary watchdog into excessive deficit breaches committed by the five countries, one EU official said.

The French central government deficit, one part of the overall shortfall, stood at 125.8 billion euros (187 billion dollars) on September 30 from 56.6 billion euros at the end of September last year.

The ministry said the figures were in line with its forecast for the whole year of a government deficit of 141 billion euros.

French Finance Minister Christine Lagarde has already warned against launching an over-ambitious national loan for strategic investment, announced by President Nicolas Sarkozy in June.

The commission's proposals have still to pass across the desks of EU finance ministers, but its zeal on the issue stems from figures issued last week showing that eurozone public deficits were set to triple this year to reach 6.4 percent of GDP, and almost 7.0 percent in 2010.

A total of 20 of the 27 EU nations have so far been warned for breaching the bloc's guidelines, designed to promote stability and growth across intertwined economies.

A gradual recovery taking hold through 2011 will increase political pressure on EU member states to reduce deficits that have soared as governments borrow massively to fund stimulus measures.

At the same time, however, rising unemployment in the core 16 nations that use the euro currency may leave governments hesitant to cut back spending for risk of jeopardising jobs and the broader recovery.

Greece is already under fire over its deficit and has been ordered to start reducing its size next year.

Deadlines will also be set on Wednesday for Austria, Belgium, the Czech Republic, Italy, the Netherlands, Portugal, Slovakia and Slovenia.

EU member states have formally agreed to start beating a retreat on unsustainable housekeeping by 2011 "at the latest," ongoing recovery permitting.

However, agreement on when to pull out state guarantees for banks is proving much tougher to nail down.

A French diplomat said on Monday that its planned deadline of 2010 should be followed by its EU partners, otherwise there will be "distortions" to competition for credit.

But both the Dutch and the Swedish finance ministers batted away that request ahead of talks on the issue over breakfast on Tuesday.