FRANCE FACES BUDGET CUTS TO MEET EUROPEAN TARGET / THE NEW YORK TIMES ( A MUST READ )

July 2, 2012
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France Faces Budget Cuts to Meet European Target
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By STEVEN ERLANGER

PARIS — Monday was probably the day that the honeymoon ended for France’s new Socialist president, François Hollande, and the hard work began.

      

A much-anticipated report from the independent French agency that audits the budget said bluntly that Mr. Hollande and his government must find between 6 billion and 10 billion euros, up to $12.6 billion, in new revenue or spending cuts by the end of this year, and extract an additional 33 billion euros, or $41.5 billion, next year, to meet promised budget targets.

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With economic growth nearly at a standstill — the auditing agency predicted it to be only 0.4 percent this year and 1 percent the next — France would need to cut its budget by about 4 percent next year to reach the European Union’s official deficit target for members of 3 percent of annual gross domestic product, a goal Mr. Hollande has vowed to meet. With France’s total debt now at 89.3 percent of G.D.P., and expected to exceed 90 percent this year, France risks being made the next target of speculators on the euro zone’s finances, after Spain and Italy — and perhaps even before Italy, some warn.

 

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The coming year, 2013, is “a crucial one in which the budgetary calculation will be difficult, more difficult than thought because of slower growth,” said Didier Migaud, who is head of the auditing agency, the Cour des Comptes. “It will require an unprecedented brake on spending and higher taxes.”


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Mr. Migaud, who is a Socialist, said that France was “in the danger zone in terms of its economy and public finances, and we cannot rule out the possibility of a debt spiral.”

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No one in the Hollande government will call what is coming “austerity,” instead placing blame for the need for adjustments on the global economic slowdown and on the previous government of Nicolas Sarkozy, whom Mr. Hollande defeated in May.
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“There will be tax increases; there will be spending cuts,” said the finance minister, Pierre Moscovici, last week. “But I reject any talk of austerity. We must avoid a budget policy that hurts economic activity.”

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But it is not clear how the government plans to go about that, since both spending cuts and higher taxes tend to depress already lackluster economic activity even further. Nicholas Spiro, who runs a sovereign risk consulting agency in London, said that the report by the auditors “throws the scale of the fiscal challenge facing Mr. Hollande into sharp relief.”

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The audit report will provide political cover to cut the deficit, Mr. Spiro said, but “the trick is for the government to impose austerity without claiming it’s austerity.”

 

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In an interview published Monday in the conservative newspaper Le Figaro, Mr. Moscovici said there would be increased spending in priority areas “like education, justice, security and the unemployment office.” But he added that, “for the rest, we need to make savings.”

 

      

On Sunday evening, Mr. Moscovici criticized the previous government. “They did nothing to reduce the deficits this year,” he said on Radio France Internationale, using an impolite phrase. “So they should shut up, in God’s name.”

 

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Alain Juppé, the former foreign minister, answered Mr. Moscovici on Monday morning on Europe 1 radio, saying that critics on the right would not shut up, and added that “this is the dream of any dominant power, not to have an opposition.” Mr. Juppé is considering a bid to head the Union for a Popular Movement, the center-right party previously led by Mr. Sarkozy.

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The real problem, said Mr. Migaud, the audit chief, was that the Sarkozy government had relied on growth figures that were too optimistic, which meant its estimates for tax revenues were too high. He recommended that the new government cut spending before raising taxes further, especially on companies, which would damage French competitiveness.

 

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Prime Minister Jean-Marc Ayrault will tell Parliament on Tuesday how the government plans to shrink the deficit and promote economic growth; on Wednesday, he is scheduled to present a modified 2012 budget to reach this year’s deficit target of 4.5 percent of G.D.P. He has talked of an effective freeze on nominal government spending over the next three years.

 

      

But thus far the Hollande government has not been specific about any spending cuts, only tax increases. It will not raise the value-added tax on consumption, but says it will repeal an increase in the tax instituted by Mr. Sarkozy. Nor has the government outlined any structural reforms to reduce unemployment, which remains at a record high in the euro zone.

 

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According to figures released Monday by the European Union, in May, unemployment was 11.1 percent in the 17 European Union countries that use the euro, the highest since the currency was introduced in 1999. The figure was up 0.1 percent from April and youth unemployment was at 22.6 percent. In France, unemployment is 10.1 percent, compared with 5.6 percent in Germany and 4.1 percent in Austria. Joblessness among French youths is 22.7 percent.

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Mr. Hollande campaigned on promises to create new jobs, hire more teachers and police officers; raise the minimum wage; impose a 75 percent income tax rate on the richest; and raise corporate taxes, including a 3 percent tax on dividends. He also called for the restoration of tax on overtime and introducing a financial transaction tax.

 

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So far, the markets have been kind to France, concentrating their fire on Spain and Italy, and considering France as a relatively safe haven after Germany. But for a country “that suffers from serious fiscal imbalances” and has the euro zone’s highest level of public spending as a percentage of G.D.P., Mr. Spiro said, “France remains ‘the lucky peripheral.’ ”

 

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In a difficult economic environment, Mr. Hollande will have a hard time ensuring that the country’s luck does not change.