EU unlikely to punish France for budget lapse

Low growth forces Hollande retreat
By Hugh Carnegy
Financial Times, 14 February 2013

France’s socialist government has signalled that it will not hit its targets for cutting the deficit as the economy falters, in a challenge to EU-enforced fiscal rules championed by Berlin.

The move came shortly before publication of official figures on Thursday showing the economy shrank by 0.3 per cent in the fourth quarter of last year, leaving growth flat over the year as a whole.

With indicators showing growth is unlikely to resume until the second half of the year, President François Hollande prepared the way for the government to retreat on its growth and deficit targets earlier this week, saying: “There is no point in sticking to objectives if they are not going to be achieved.”

The remark was widely interpreted as a signal that the government would soon revise downwards its optimistic target of 0.8 per cent growth this year.

That would have inevitable consequences for achieving the budget deficit reduction it had promised its European partners – and on which Mr Hollande had pinned the credibility of his government’s commitment to restore France’s debt-burdened public finances.

The Cour des Comptes, the national auditor, put the nail in the target coffin on Tuesday, saying bluntly that the growth projection was overblown and there was little chance that cutting the nominal budget deficit to 3 per cent of gross domestic product this year, as agreed with the European Commission, would be achieved.

Jean-Marc Ayrault, prime minister, said on Wednesday that France “will not be exactly at 3 per cent at the end of the year” because of lower growth – although he reiterated the government’s pledge to eliminate the deficit by 2017.

Pierre Moscovici, the finance minister who had for months insisted that the government would hold to the 3 per cent target, suddenly switched tone on Wednesday, saying that, if necessary, “different objectives” would be “re-evaluated and re-examined”.

Mr Moscovici added pointedly that Paris did not want to “add austerity on austerity, either for France or for Europe”.

Insee, the national statistics agency, said manufacturing output fell 2.3 per cent in the fourth quarter after a 0.9 per cent rise in the third. “Apart from the food industry, all major [manufacturing] branches contributed to this big fall, the strongest since the first quarter of 2009,” Insee said.

The government’s belated acknowledgment of weaker growth came as little surprise to many observers. In November, the European Commission predicted French growth of 0.4 per cent and a deficit of 3.5 per cent. Its next estimates, due on February 22, are hardly likely to be any better.

The Organisation of Economic Co-operation and Development has forecast 0.3 per cent growth. Some economists, including Guillaume Menuet at Citi, see a slight shrinkage in the economy this year.

The painful signs for the government are clear to see: unemployment has hit 10 per cent of the workforce and is continuing to rise; a wave of industrial redundancies shows little sign of abating as demand shrinks in key French markets such as Italy and Spain; household consumption, traditionally a mainstay of the economy, fell in the fourth quarter.

French governments have a long record of overpromising on growth and failing to meet performance targets for the public finances as a result. Avoiding a repeat was supposed to be a mark of Mr Hollande’s government, which has castigated a German-led reliance on austerity as the wrong medicine for the eurozone, but which signed up for “budgetary responsibility” to establish its credentials with the financial markets and, most importantly, with Berlin.

But in the current circumstances the fallout from the government’s retreat may be limited. In effect, France is hoping that the slippage in its target will be allowed under a broader relaxation agreed by Brussels in the light of the need not to damage growth further.

A switch of emphasis from nominal deficits to structural deficits, which exclude short-term factors, would help avoid the need for more budget savings on top the €38bn in tax increases and spending cuts the government is seeking this year.

“What needs to be done now is for European governments to lobby the commission and other member states for a switch to structural targets,” says Mr Menuet.

Olli Rehn, the EU’s finance commissioner, said in December that “supplementary measures” would not be “indispensable” if France did miss its nominal deficit target.

But Mr Menuet cautioned that France still needed to press on hard with reductions in its huge public spending bill as it had promised to reduce its structural deficit this year to 1.6 per cent of GDP from 3.5 per cent.

“It matters that targets are met, at least on a structural basis. It shows that the government is following its long-term plan. But I’m not sure that the structural deficit target can be achieved. Two percentage points is a huge task.”

Copyright The Financial Times Limited 2013France’s socialist government signalled in February 2013 that it will not hit its targets for cutting the budget deficit as the economy faltered, in a challenge to EU-enforced fiscal rules championed by Berlin.

France24, 13.02.13: France ‘to miss 2013 deficit reduction pledge’ http://www.france24.com/en/20130213-france-unlikely-keep-public-deficit-goal-promise-eonocmy-debt

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