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France risks missing 2013 deficit goal, EU Commission says

By Robin Emmott

BRUSSELS (Reuters) - The European Commission warned France's new Socialist government on Wednesday it was on track to miss next year's deficit goal, prompting Paris to insist its drive for a growth agenda in Europe would not stop it from honoring budget targets at home.

French President Francois Hollande wants to ease the pace of German-led austerity in Europe which some economists blame for suffocating national economies, but France's ability to meet its goals is crucial to the euro zone's credibility with investors.

In an annual assessment of France's economic performance, the Commission warned that current budget plans for next year - inherited from the previous conservative government - would leave Hollande's government some way from reaching its 3 percent deficit target.

The Commission forecast the budget shortfall would narrow only slight to 4.2 percent, from 4.4 percent in 2012. Economists polled by Reuters think next year's deficit could actually rise to 4.6 percent.

"French authorities need to specify the measures necessary to ensure that the excessive deficit is corrected by 2013," the Commission said, saying budget consolidation was one of France's biggest policy challenges.

French Finance Minister Pierre Moscovici, speaking after meeting Eurogroup President Jean-Claude Juncker in Luxembourg, said Paris was ready to take the appropriate steps.

"France will respect its commitments in terms of public finances. We will meet the deficit target of 4.5 percent in 2012 and 3 percent in 2013," he told a news conference.

Hollande has suggested he may have inherited worse-than-expected public finances from his conservative predecessor Nicholas Sarkozy and has ordered an audit of the state accounts for the end of June.

An extraordinary session of parliament in July is then due to re-draft the 2013 budget. Many observers expect Hollande's government to use the audit as an excuse to roll back generous spending promises made during the election campaign.

Moscovici insisted, however, that France wanted progress on a strategy to stimulate growth in the euro zone, including discussion of joint euro bonds and common oversight of banks to end the risk that governments' finances could be dragged under by a weak banking system, and vice versa.

"If Europe is only about austerity, is only about punishment, then Europe is going to lose touch with the people."

NO SPENDING SPLURGE

France is the euro zone's second largest economy and, along with Germany, central to European integration and the EU's global standing. Any suggestion that it is plagued by economic difficulties like those of indebted Spain, Greece and Ireland could complicate efforts to resolve the euro zone debt crisis.

"The high level of public debt poses a threat to the sustainability of public finances, and the recent rise in bond spreads suggests that markets are concerned about the country's fiscal position," the Commission report warned.

The Commission said France needed to rein in spending increases, keeping these under the level of economic growth, which the EU's executive sees at 0.5 percent this year and 1.3 percent in 2013.

That would squeeze Hollande's campaign promises to hire 60,000 school staff and create 150,000 state-aided jobs in a country with one of the world's highest levels of public spending.

EU Economic and Monetary Affairs Commissioner Olli Rehn said he expected Hollande to announce new measures to tackle the deficit once the audit was complete.

"I expect that France will, shortly following the review conducted by the Cour des Comptes, present concrete measures in order to ensure it respects its commitments," Rehn said, referring to the French court of auditors.

With the Commission's growth forecasts below those of the French authorities for next year, the report said such measures should be cuts in government spending and tax reforms.

"In terms of fiscal revenue, the number and cost of tax expenditures is to be further reduced," the Commission report said. "Moreover, despite measures to reduce taxes on labor, further efforts are needed to develop a tax system that is more conducive to sustainable economic growth."

(Additional reporting by Matthias Blamont in Luxembourg and Daniel Flynn in Paris; editing by Rex Merrifield)

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