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France has admitted it will overshoot the EU's 3% budget deficit target this year, putting the eurozone's second-biggest economy on a collision course with Brussels.
French finance minister Michel Sapin said Paris would fail to cut its budget deficit to the EU limit before 2017, with a deficit for this year of 4.4% of GDP, falling only slightly in 2015 to 4.3% – well above the maximum permitted, though smaller than the UK's 5.6%.
He added that growth this year would be a sluggish 0.4%, down from an initial estimate of 1%.
France is gambling that EU officials will be forced to recognise that low growth and poor tax receipts in recent years have hampered efforts to bring down the budget deficit.
President François Hollande, who is battling to restore his reputation following wounding allegations by his former lover Valérie Trierweiler, expects to suffer budget deficits in excess of 3% for two more years and is lobbying for greater flexibility from Brussels.
The German chancellor, Angela Merkel, has stepped into the debate, making it clear that respect for the EU's 3% deficit target was needed to promote growth within the 28-member currency zone.
"We should take very seriously that the [European] commission has now rightly indicated that straying from the reform course is the biggest risk for further recovery," she told German MPs.
The beleaguered finance minister, who has presided over two quarters during which the economy has stagnated, also suffered bad news from the manufacturing sector, which contracted 0.3% in July. Broader figures showed industrial production grew by 0.2%, boosted by energy production.
HSBC analyst Mathilde Lemoine said: "These numbers do not show a strengthening in industrial production momentum against expectations: after two quarters of decline, French industrial production could only stabilise."
Officially, Paris was banking on a growth rate of 1% this year, but Sapin had already admitted this was too optimistic and predicted last month the economy would grow by around 0.5%. The French economy will only get back to 1% growth next year, Sapin said.
Merkel, who has presided over Germany's first budget surplus in 45 years, appeared to take a tough line when told of France's latest predicament.
She has succeeded in putting two hardliners as commissioners in charge of the EU's budget, heightening expectations that France will face a more difficult negotiation in Brussels over its compliance with budget rules.
Merkel said the recovery was in place and would only be undermined by a return to debt-financed spending. She said eurozone growth was "now reality", adding: "Economic activity financed on credit is set to finally end."And she echoed comments by finance minister Wolfgang Schaeuble, saying "keeping to our incurred commitments in Europe, especially in the eurozone, must, unlike in the past, finally become the hallmark of the eurozone".
The Bundestag is due to vote on Friday on its draft budget for next year, which is expected to also register a surplus.
A German finance ministry spokeswoman spelled out that it was up to the EU Commission - the EU's executive arm - to decide how to react, including what punitive measures to take.
"Otherwise we risk our credibility, and dependability and stability are essential for confidence in the eurozone," she told reporters.
The latest budget deficit will prove a blow to Hollande, who is already the most unpopular president in modern history. Last year he predicted a recovery in 2014, but the country has continued to struggle with record unemployment and stagnant growth.
He has made clear that France wants the European Central Bank (ECB) to make credit cheaper to drive growth and create jobs. The ECB president, Mario Draghi, reluctantly backed further easing of credit in July, though he has argued it is the job of governments to spur growth based on reforms of business and labour markets.
Hollande has lobbied alongside the Italian prime minister, Matteo Renzi, for the EU commission to adopt greater flexibility with respect to budget deficit rules and for Draghi to go further and adopt electronic money printing, known as quantitative easing.
Italy's GDP growth is forecast to be zero this year. Rome needs to slash €20bn (£16bn) in spending next year to keep its deficit at or below the EU deficit limit while making labour-tax cuts and maintaining recent income-tax reductions.
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