France pays high price for austerity

Date: 07/12/1995

By Tim Jones

AS EU leaders prepare to gather in Madrid to sign off the plans for a single currency, the entire project is facing its gravest threat in France.

The crisis in France seems certain to overshadow a meeting between President Jacques Chirac and German Chancellor Helmut Kohl today (7 December) in Baden-Baden.

Economic and monetary union was supported by the French government more than anyone. Former President François Mitterrand only offered his backing for German reunification in return for Chancellor Kohl's support for monetary union. But a price is now being paid for linking the franc with the deutschemark. The country's road and rail networks have been crippled by a two-week public sector strike against a radical programme to slash spending on France's costly social security system.

Prime Minister Alain Juppé is determined not to back down, but his position and that of his government is under threat from the most serious industrial action since the mid-Eighties.

At stake is France's already precarious hold on the targets it needs to meet to join the single currency bloc in 1997. The government must cut its budget deficit, including the gap between social security spending and income, to 3&percent; of national income. While other targets in the Maastricht Treaty may be open to interpretation, the 3&percent; rule has become almost sacrosanct to Germany.

To reach this, the efforts must be great and painful to the public sector. In September, Juppé announced measures aimed at reducing the deficit from more than 5&percent; this year to 3.55&percent; of national income in 1996.

He promised a more detailed package to cut welfare spending in November. When it came, it shocked the National Assembly and brought labour unions and students on to the streets.

Under the Juppé plan, the social security fund's accumulated debt of 35 billion ecu would be repaid over 13 years with the aid of a new 0.5&percent; levy on all income, and its deficit would be cut from 9.9 billion ecu this year to 2.6 billion ecu in 1996.

At the same time, the method of funding the system would shift from payrolls to levies on income.

Pension contributions would be extended for an extra two years, family allowances would be frozen in 1996, while spending caps would be imposed on hospitals and drugs bills.

While the government has made it clear that it is prepared to discuss the implementation of its plans with the unions, it is not in a position to change much if it wants to meet the 3&percent; target.

Forecasts published by the European Commission only last month show how slim Juppé's room for manoeuvre is. Even taking into account these new measures, the Commission expects the budget deficit to edge down to just 2.9&percent; in 1997.

But the government remains confident, at least on the surface.

At last week's meeting of EU finance ministers, France's Jean Arthuis was upbeat on the country's prospects for signing up to a single currency but warned his countrymen against avoiding action against deficits now.