By Stephen Sandelius
PARIS (MNI) – France will have to adopt tougher austerity measures
and revamp its traditional fiscal strategy if it hopes to hit its
deficit targets for the coming years.
With a public deficit expected to top 8% of GDP this year, France
is not all that far from the levels in Spain and Portugal that have
fanned speculation on debt yields. Apart from Ireland, its budget
targets for the coming years are among the least ambitious in the
Eurozone.
Along with the depreciation of the euro and the growing awareness
of the need for better fiscal policy coordination in the Eurozone, the
Greek debt crisis has had another positive spinoff for France: it has
diverted market attention from its own lax fiscal practices.
“France has a poor track record in meeting the deficit targets in
its stability programs,” the OECD reminded gently this week.
However, the price that Germany is demanding in exchange for its
new leading role as Eurozone lender of last resort is a stiff one:
strict compliance with EU deficit norms and tougher sanctions as a
measure of economic governance in EMU.
With typical teutonic determination, Berlin is walking the budget
talk, and France is struggling to keep pace.
Inspired by Germany’s constitutional ban on budget deficits after
2016, Paris is now tinkering with its own version. But since there is no
appetite across the political spectrum for such rigid discipline,
President Nicolas Sarkozy may have to settle for a constitutional
amendment that would merely oblige each new government to fix a
trajectory for the deficit over its five-year term and a prospective
date for budget balance.
The new wind blowing out of Berlin has also altered the atmosphere
in Brussels. But when the European Commission dared to suggest that
national budgets be submitted in advance to the Eurogroup of finance
ministers for scrutiny and peer review, French politicians were among
the first to hoist the banner of national sovereignty in protest.
Economic governance would seem to translate into French as “coordination
a la carte.”
Ultimately, however, France will have to rectify its cavalier
attitude toward the Stability Pact. Traditionally, its stability
programs have laid down acceptable deficit goals that were tied to very
optimistic growth assumptions. While government spending targets were
often met, cyclical swings in activity and automatic stabilizers meant
that deficit targets were rarely reached.
In good times, France coasted along with a deficit below the
Stability Pact ceiling of 3%. In bad times there were other countries in
worse condition to catch the flack. The medium-term goal of budget
balance remained…an eternal medium-term goal.
France’s current stability program is typical in that it targets a
deficit of 3% by 2013 under the assumption that GDP growth rebounds to
2.5% starting next year. Even the most optimistic observers doubt this
is realistic. The OECD this week hiked its GDP forecast for 2011 to
2.1%.
Prime Minister Francois Fillon has imposed stricter budget
discipline in recent years, freezing government spending in real terms
and limiting the rise in health care spending. This was achieved in part
by transferring some of the more dynamic elements of social outlays to
local governments.
Earlier this month Fillon tightened the screws a bit by applying a
freeze on nominal government spending through 2013, with a reduction in
operational outlays of 5% next year and 10% by 2013. This would allow
for an expected E5 billion rise in civil servants’ pensions and interest
payments on the ballooning public debt.
Comparable reductions over the next three years will be imposed on
social transfers — aid to the handicapped and income and housing
supports, for example — and on public subsidies for public transport,
work programs and maintenance. The goal is a savings of E6 billion over
three years.
On the revenue side, the government intends tighten or close tax
loopholes and incentives amounting to E5 billion over the next two
years. Sarkozy has also conceded that levies on investment returns and
high incomes be hiked as part of this year’s reform of the pension
system.
As painful as the spending cuts will be to a population fiercely
attached to public services and social spending, they pale in comparison
to the drastic austerity measures being applied in Spain, Italy and
Portugal, not to mention Greece.
France’s effort will not suffice to stem its debt spiral, according
to a study released last week that was co-authored by the heads of the
national statistics institute, Insee, and the Public Statistics
Authority. Assuming annual growth of 2.6%, they estimate that it would
take France a decade to recoup the impact on the deficit of the recent
recession.
Assuming growth of 2%, the annual adjustment in the budget required
over the next 10 years to cap the public debt at 90% of GDP — 30 points
above the Stability Pact limit — would amount to E14 billion, three
times the impact of consolidation efforts of the past decade, the
authors argue.
MORE
–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com
[TOPICS: MT$$$$,M$F$$$,M$X$$$,MFFBU$,MFX$$$,MGX$$$]
