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Hollande party split on French deficit goal

French President Francois Hollande arrives to speak with journalists at the Elysee Palace in Paris, October 1, 2012. REUTERS/Christian Hartm
French President Francois Hollande arrives to speak with journalists at the Elysee Palace in Paris, October 1, 2012. REUTERS/Christian Hartm

By Nicholas Vinocur

PARIS (Reuters) - French President Francois Hollande faced divisions in his party on Tuesday over a 2013 budget crucial to his credibility with euro zone partners, after top Socialists publicly questioned next year's deficit target.

The split over the cut in the budget shortfall is the latest political embarrassment for Hollande just as surveys show his popularity ratings have nose-dived since his election on a perception he is not doing enough to kick-start the economy and tackle unemployment at 13-year highs.

His coalition is also struggling to show a common front on the European Union fiscal pact agreed by EU leaders in March this year and which is due to get its first reading in the French lower house on Tuesday.

Five months after his election victory, the President unveiled his first annual budget last Friday including 30 billion euros ($38.7 billion) in tax hikes and a spending freeze aimed at slashing France's deficit to 3 percent of output.

The measures were intended to show Germany and other euro zone neighbors that France will play its part in ending the sovereign debt crisis, and to persuade financial markets to keep French borrowing costs at their current low level.

But a string of leading Socialists have since raised doubts over whether France will stick to the 3 percent deficit goal as its economy teeters close to recession, forcing the government to re-affirm that the target would be kept.

"We should not forget that if France does not keep its word, that is to say does not meet its deficit-reduction targets next year, then our status as a sovereign borrower will be devalued," Budget Minister Jerome Cahuzac told RTL radio.

"I think we will reach that target in 2013," he added.

France's medium- and long-term debt is currently yielding an average of around two percent as markets for now accord it the status of a core member of the euro zone.

Crucial to that status is the credibility of annual deficit-reduction targets fixed by Hollande in an effort to balance the budget by 2017. But the official due shortly to take the helm of his Socialist Party said strict adherence was not essential.

"The three percent is just a means, if economic conditions allow it," said Harlem Desir, who last month was nominated by party bosses to become the next party leader.

"Whether they are there this year or the year after is not the essential question," he said in a radio interview on Monday, insisting that nurturing jobs and investment were the main goal.

Claude Bartolone, the Socialist head of the National Assembly, has already called the target "untenable" due to flagging economic growth and Socialist Party spokesman David Assouline said more flexibility was needed on deficits.

Many economists already believe firmly that France will miss the 2013 target by a few percentage points, because the budget is based on a 0.8 percent growth forecast they view as unrealistic.

While the pact on budgetary discipline is expected to be passed thanks to votes from the right-wing opposition, a number of deputies from Hollande's Greens coalition partner have said they cannot back the bill and other left-wing deputies are wavering.

Prime Minister Jean-Marc Ayrault has repeatedly called on deputies to vote in favour of the pact, arguing the credibility of Hollande's government will be damaged if it has to rely on opposition votes to get the bill through parliament.

The final vote is due on October 9 with a law to enforce the pact due by the end of the month. ($1 = 0.7749 euros)

(Editing by Catherine Bremer and Patrick Graham)

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