Sarkonomics

After German Chancellor Angela Merkel managed to painstakingly steer the EU out of its constitutional crisis last month, it seemed the bloc's worst headache was over and that

Brussels could look forward to a period of relative calm. But newly elected French President Nicolas Sarkozy rocked the EU boat again this week with his controversial economic policies.

Ahead of a meeting of EU finance ministers in Brussels this week, the French leader made no secret of his intention to dilute the EU's Stability and Growth Pact and thus play for more time to honor his election promise of carrying out a series of tax cuts in France.

Sarkozy flexes muscles

The 13 EU members of the euro zone agreed in April to balance their account books by 2010. Though Sarkozy voiced his commitment towards that goal in Brussels, he also stressed it could only be achieved if France's economic growth was higher than it has been so far.

In other words, he gave himself the go-ahead to violate the EU's budgetary rules that lay down that the budget deficits of member states should not exceed 3 percent of GDP.

"Sarkozy's behavior is part of the French strategy to flex its new muscle in the EU," said Henrik Uterwedde of the German-French Institute (DFI) in Ludwigsburg. "Ever since the failure of the French referendum on the EU constitution, Paris was almost absent in Europe."

Violating the EU budgetary rules is nothing new for member states. Germany has done it repeatedly. But that took place at a time when the general economy in Europe had come to a near standstill. Now, with the European economic motor having revved up again, experts say there is a renewed readiness in the EU to stick to fiscal discipline.

"That's why the EU states have once again committed themselves to the Stability and Growth Pact. They want to prepare for lean times with new saving measures," said Michael Schröder, an economist at the Center for European Economic Research in Mannheim.

France goes down special path

France however seems to be carving out its own path away from the general consolidation course that other EU members states are following, dealing a blow to the new found faith in the pact.

EU diplomats have warned of France "opening the flood gates" because EU budget offenders such as Italy or the Czech Republic could then follow the French example.

Remi Allement, economist at the Center for Strategic Studies in Paris said France had trouble following a steady budgetary policy.

"The old government wanted to lower the deficit fast. Sarkozy on the other hand would rather take a break."

Brussels however is powerless in taking action against pact violators. The Stability and Growth Pact lays down that during periods of economic growth, EU member states should cut new debts by half a percent each year. But Brussels can't impose any sanctions on those who don't. When deficits of countries exceed the three-percent ceiling, the EU can initiate disciplinary proceedings.

But France will probably escape that since its deficit is estimated to be around 2.4 percent in 2007. In January this year, the EU released France from a similar process.

Sarkozy takes aim at ECB

It isn't just the EU's Stability and Growth Pact that Sarkozy is taking aim at. He's also rallying against the high value of the euro because it's damaging French exports. Experts point out it's not the first time the French leader has attacked the European Central Bank (ECB).

It's well known, they point out, that Sarkozy wants to weaken the ECB. Allement said Sarkozy would much rather that a "European economic government" had more influence on the interest rate and would increase the EU's clout on the international finance stage.

"But Sarkozy is alone with his plans. The EU member states want a strong ECB," Schröder said.

Finance ministers in Brussels have stressed the importance of an autonomous currency bank. Jürgen Stark, member of the ECB board has said those who question the existence of the ECB "endanger the business fundament and a smooth functioning of the euro zone."

Uterwedde said France was more interested in an active financial policy with growth and jobs as goals. That's why Sarkozy was trying to step up political pressure on the ECB and tie it closer to the budgetary policies of the euro zone states.

"But he's choosing the wrong way to go about it with his offensive. His approach against the ECB is counterproductive," Uterwedde said.

Sarkozy man may get IMF job

Sarkozy's pushiness in financial circles is however paying off in some respects. In the face of opposition from some of his colleagues, Sarkozy backed former Socialist finance minister, Dominique Strauss-Kahn to head the International Monetary Fund (IMF).

It remains unclear whether Strauss-Kahn will get the broad backing he needs to get the post. Britain has said it wants the job to be thrown open to worldwide competition instead of remaining a European preserve.

Experts say that if the French candidate does land the job, Sarkozy's economic reform zeal will know no bounds.

"He (Sarkozy) will probably not stop presenting new proposals for EU economic and fiscal policies," said Uterwedde.