Europe France’s economy
A reluctant government faces the imperative of public-spending cuts
Franse’s finance minister, Pierre Moscovici, staged a charm offensive in London this week to improve his country’s battered economic image. Days after the European Commission had forecast that France would miss its budget-deficit target of 3% of GDP in 2013, a key promise of President Francois Hollande’s, Mr Moscovici urged people to look beyond “simplistic stereotypes”. The government may miss its target, he said, but it was making structural reforms to restore competitiveness and sound public finances.
The commission’s verdict was sobering. French GDP will grow by 0.1% this year, compared with a government forecast of 0.8%, and the deficit will reach 3.7%. After long defending the 3% target as a sign of its credibility, and insisting on overly ambitious growth forecasts, the government has abruptly switched message to plead for more time. And the commission clearly intends to opt for indulgence.
Without much struggle, it seems, France has won the argument that it should not be punished for its failure. It blames poor growth—the commission forecasts a euro-zone recession in 2013—and fears that more belt-tightening might make things worse. The French claim that, judged by the structural deficit, adjusted for the cycle, the government has made a bigger effort than at first appears. Mr Moscovici does not plan an emergency budget to squeeze the deficit back towards 3% this year, partly for fear of provoking “a political and social shock”. Jens Weidmann, the Bundesbank chief, said that “putting consolidation off would just shift the problem into the future.” But the German government stayed silent and Wolfgang Schauble, the finance minister, told a newspaper he was “fully confident” thatFrance was on the right track.
Mr Moscovici may get away with drift once, but he is unlikely to be indulged twice. As it is, letting him off the hook depends on taking seriously his efforts to sort out the public finances. This year, three-quarters of the effort to curb the deficit consists of higher taxes, says the Cour des Comptes, the national auditor. Yet with a total take of over 44% of GDP, Franceis already the most heavily taxed country in the euro. Companies and the rich have been squeezed; investment has gone on hold. The constitutional court has rejected Mr Hollande’s planned 75% top income-tax rate, although the government plans to revive it in another form. Even some Socialist deputies concede that the government cannot go on pushing up taxes.
That leaves no choice but cuts in public spending. Mr Moscovici says these will account for “most” of the deficit reduction in the 2014 budget. This is where the hard part begins. The commission forecasts a deficit in 2014 of 3.9%, even higher than in 2013, as well as a rise in unemployment to 11%. The government has begun to float various ideas, such as means-testing family benefits and lengthening the period for pension contributions. A policy review is under way with the aim of eliminating duplication and cutting jobs. The prime minister, Jean-Marc Ayrault, has set up a commission to look into pension reform. “This is all very different to what Socialist governments did before,” says an insider.
The difficulty is political. It may be evident to outsiders—and to some in the government—that, given its competitiveness and growth problems, France has no choice but to rethink its generous welfare state and well-staffed public sector. But a year after the 2012 election campaign, public debate has barely begun. Mr Hollande was elected on a promise to kick-start growth, cut unemployment and end austerity. Now he presides over recession, rising joblessness—and the need to impose more austerity on dumbfounded voters.