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France quietly counts its friends for EU deficit leniency

By Mark John PARIS (Reuters) - From Athens to Madrid and Dublin to Rome, France can count on a sympathetic hearing in several European capitals in its campaign for leniency over the latest broken promise to bring its public finances into shape. That will help it stand up to pressure from fiscal hawks in Berlin and elsewhere who believe the time has finally come for the euro zone's second largest economy to taste some of the bitter reform medicine swallowed by its southern neighbours. France's Sept. 10 admission that it needs two more years to cut its borrowing back to EU limits has unleashed mixed feelings in a region trying to win back credibility after the 2009-2012 sovereign debt crisis that nearly tore the euro zone apart. The prospect of making a public example of a founder member - for example with EU fines - is seen as unpalatably harsh by all but the most fervent of austerity advocates, officials canvassed around the 28-nation bloc by Reuters said. Yet any hint that France, which unveils its 2015 budget on Wednesday, could be let off the hook for the latest in a decade of broken promises also stirs a sense of moral indignation among those who argue that Paris cannot get away scot-free. "The Germans, Dutch, Finns and Balts aren't alone in looking harshly at France's budget," EU Commissioner Guenther Oettinger, a conservative party ally of German Chancellor Angela Merkel said this month. "The Greeks, Irish, Portuguese, Cypriots, Spanish - all those who went through the mill of the troika - are much tougher," he said of the countries whose economies were reformed painfully under EU-IMF tutelage during the crisis. One of the toughest tasks for the incoming European Commission of Jean-Claude Juncker will be to deal with France's latest transgression firmly enough to avoid a further loss of confidence in the bloc's already battered budget rulebook. He will watch new economic affairs commissioner Pierre Moscovici closely to ensure the former French finance minister - whose confirmation hearing in the European Parliament is due on Thursday - is not judged to be doing his country any favours. SOFT-LINERS Alarm over French finances grew as Les Echos daily reported that the budget to be unveiled on Wednesday would show that the so-called structural deficit, taking the economic cycle into account, would be cut even less than promised. Yet France's case could be helped by a shift in mood - led by ECB chief Mario Draghi and the IMF - away from the austerity of recent years, together with the fact that several EU states need clemency on their own budgetary issues. "Greece has its own problems, and it is focused on solving them," a Greek official said on condition of anonymity. Athens counts France as an ally as it seeks to draw a line under four years of austerity and put an end to a deeply unpopular bailout programme before elections next year. Ireland, which is just emerging from over half a decade of budget cuts, has sounded tough in public about fiscal rigour, with Finance Minister Michael Noonan this month describing France and Italy as "floundering" due to fiscal imprudence. But behind the scenes, its line is softer. Dublin wants the EU to change the method of calculating its structural deficit and is on the look-out for support in its campaign. "Dublin has not been pushing hard for Paris to stick rigidly to its targets," an Irish government source acknowledged. France's southern neighbour Spain has since 2012 twice been granted more time to cut its deficit and is now anxious to avoid anything that would jeopardise a tentative economic recovery - including imposing austerity on its biggest trading partner. "Spain has worked to meet these (budget) goals, but within these pacts there is room - in fact that room was used in the case of Spain," a government source said, reflecting the pro-growth stance of Economy Minister Luis de Guindos. FISCAL HARDCORE France can count Italy, current holder of the EU's rotating presidency and which itself is edging closer to the EU's upper deficit limit of 3 percent of output, as a firm ally. Yet budget hardliners are determined to press their case for a strict reading of the EU's stability pact on budgets. "There was an intense debate about this," a Cypriot source said of a Sept. 12 meeting of euro zone finance ministers in Milan two days after France's admission. "Austria was very vehement about this and the position of several countries - Cyprus included - was that the stability programme must be adhered to, regardless of the size of the country," the source added, counting Portugal in the group. Austrian and Portuguese officials have been vocal in support of a strict application of budget rules - although Lisbon's position may yet be moderated by news on Tuesday that it will miss its own deficit target for this year. The stage is set for weeks and perhaps months of wrangling over how to deal with France, complicated by the arrival of a new Commission team and the application of an additional set of rules, the so-called fiscal compact, brought in after the debt crisis to reinforce the stability pact. Under the new rules, France would need a qualified majority of states to overturn a Commission recommendation for disciplinary action against itself, and would be barred from taking part in the vote. So its main effort must be to prevent Brussels making such a proposal in the first place. The EU could also push France to go beyond relatively modest reform steps planned so far, notably an easing of burdensome worker representation rules in companies, a simplification of labour laws, and an opening up of closed professions from pharmacists to notaries. Paris is honing its arguments, insisting euro zone growth is weak enough to constitute an "exceptional circumstance" which offers leeway in the pact, and warning of a rise in support for the anti-immigrant National Front if budget cuts are pursued. Those arguments failed to impress Merkel during a trip to Berlin by Prime Minister Manuel Valls last week, sources briefed on their meeting said. France's critics note this year's reduced growth forecast of 0.4 percent is not far below the 0.6 percent used by EU ministers when they set the deficit reduction target last year. Some Brussels insiders reckon Paris may be granted one extra year to reach the 3 percent target rather than the two years it says it needs. That would set a deadline awkwardly at the end of 2016, six months before the next French presidential election. Ultimately, the appeal which may have widest resonance is that the $2.7-trillion French economy - worth roughly a fifth of total euro zone output last year - is too big to let fail. "No one has an interest in France falling into recession, not Germany either," Philip Cordery, national secretary for European policy in France's ruling Socialist party. "If we fell into recession by going too fast in reducing the deficit, France would be a burden on the whole of Europe." (Additional reporting by Reuters staff in Paris, Athens, Lisbon, Madrid, Berlin, Nicosia, Vienna and Dublin; Editing by Paul Taylor)