FRENCH CRACKS IN THE EURO-ZONE CORE / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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MAY 12, 2010, 6:32 A.M. ET.

French Cracks in the Euro-Zone Core .

By MATTHEW CURTIN

Key to the €750 billion ($951 billion) euro-zone bailout package is the idea that the core will rescue the periphery. But how strong is the single currency's core?

Public finances in France, the second-biggest euro economy, are nowhere as poor as Greece's. But they are stretched in a country long resistant to substantive fiscal reform.

At nearly 80%, France had the fourth-highest ratio of government debt to gross domestic product in the euro zone in 2009. It is rising inexorably, forecast by BNP Paribas to hit 90% in 2012.

French government refinancing this year is more onerous than the U.K.'s. France's budget deficit, forecast at 8% of GDP for 2010, is above the euro-zone average of 6.6%. And French tax receipts as a proportion of GDP are already the highest in the euro zone, making it risky to raise taxes without throttling a sluggish recovery. First-quarter GDP growth was just 0.1%. French 10-year government paper, trading around a 0.30-percentage-point spread over German bunds, enjoys an excessive benchmark premium, says Citigroup.

Chastened by the events of the past weeks, President Nicolas Sarkozy has now put reducing France's budget deficit at the top of his domestic agenda. But the new measures don't go far beyond existing commitments France has made to European Union partners to reduce the deficit to 3% by 2013. France remains committed to public-sector pay constraint. The government has also added a plan to close €5 billion in tax loopholes in two years and is unwinding more of last year's stimulus measures.

With some luck, France might hit those targets. The recovery is boosting tax receipts. France's budget deficit narrowed sharply to €28.9 billion in March from €46.3 billion a year ago. Domestic demand is recovering. A weaker euro helps exports. France benefits from a liquid market in its debt and relatively strong banks.

But financing France's ballooning social-security deficit, forecast at €10.5 billion this year, is the long-term budgetary challenge. Mr. Sarkozy, his authority weakened by a poor midterm election results, faces powerful public-sector unions and a Socialist opposition set against major change, notably increasing the retirement age above 60, the best solution in the long run.

France's fiscal credibility ultimately rests on Mr. Sarkozy pushing through the reforms which, though mild by Greek standards, have proved too much for French governments over the years.

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