Promises that could plunge France into debt

Both the left and right-wing candidates going into the second round of the French presidential elections have indulged in attacks on the European Union’s economic and monetary policies as part of their campaigns.

The right’s Nicolas Sarkozy has blamed the series of interest rate increases by the European Central Bank (ECB) for strengthening the euro at the expense of export competitiveness. "Why should we be the only economic zone in the world that can’t put currency at the service of employment?" he said at a rally in early April. Socialist party candidate Ségolène Royal has called on the ECB to pursue more growth and employment-orientated policies.

The rhetoric has prompted public rebukes from the Commissioner for Economic and Monetary Financial Affairs, Joaquín Almunia, and the President of the ECB, Jean-Claude Trichet. Almunia said a few weeks ago: "Sometimes I hear arguments which take no account of economic reality which ignore what is happening in European economies."

Trichet waded into the debate last weekend, saying that the majority of French and EU citizens were in favour of price stability and ECB independence.

Given the resolute opposition from Germany to alter the ECB’s mandate in any way, the two candidates’ comments are expected to be forgotten after the second round of voting on 6 May.

But whoever wins on Sunday may be heading for a clash with Brussels whether or not the campaign rhetoric is left behind.

France’s relatively sluggish economic performance, especially compared with Germany’s, is well-known. French gross domestic product (GDP) grew by 2% in 2006 compared to 2.7% in Germany and 2.8% on average in the eurozone. This year the figure could be as low as 1.7% while Germany is forecasting growth in GDP of 2.7%.

The French government was in 2003 subjected to the EU’s excessive deficit procedure under the Stability and Growth Pact, which enforces budgetary rigour for eurozone members, though the procedure was terminated after France managed to get its deficit down to 2.5% in 2006.

But the economic plans of both candidates, if carried through, could send the deficit back over the 3% limit again, which would trigger a new excessive deficit procedure.

The cost of the economic programme of Ségolène Royal with its pledges to boost spending on education, training and research, raise the minimum wage and create new jobs has been estimated at €50 billion by 2012, raising France’s deficit to 4% in 2007 and 2008.

Sarkozy’s plans, including an exemption from tax for hours worked over the 35-weekly limit, extra spending on education and research, are estimated to cost around €32bn. Unless these tax cuts were offset by spending reductions, this would push France’s deficit to 3.5% this year and next.

Under the revised rules of the Stability and Growth Pact, governments which break the 3% limit can have extra time to bring their budgets back into line but only if the European Commission and member states believe that they are putting in place sustainable structural reforms.

Of course, promises in electoral campaigns are nothing more than that, even though Sarkozy has said "lies during the campaign come at the price of immobility in government". He has toyed with the idea of securing long-lasting reform of certain sectors where there is little competition such as licences for taxi-drivers by issuing bonds to buy out existing licence holders. He may calculate that a short-lived spike in the deficit level may be a price worth paying for longer-term change, especially if his finance minister can convince his or her colleagues in Brussels that the strategy is justified.

Daniel Gros, director of the Centre for European Policy Studies, does not believe that Sarkozy would push France’s deficit above 3% again. "It would destroy France’s reputation and diminish French influence in the EU. That would be the opposite of what he wants to achieve," Gros says. He argues that if Sarkozy did let the deficit get above 3% he would get "little sympathy" from other EU governments, especially Germany and Italy, which have been making major efforts to cut their own deficits. Berlin has cut its deficit from 3.2% in 2005 to 1.7% and is aiming for a balanced budget next year.

Against a background of stronger economic growth across the EU, especially in Germany, the challenge for the eventual winner in the French election will be to profit from the upturn to implement structural reforms to sustain growth trends and consolidate public finances. Sarkozy has already set out how he wants to modify the tax system to reward those who put in longer working hours. Royal’s programme is based on using public funds to create new job opportunities. A final assessment of the value of each candidate’s policies can be made only after Sunday’s elections. But Sarkozy has the boldest ideas about tackling France’s long-term structural problems, which include high unemployment, particularly for young people and second-generation immigrants, and one of the highest ratios of public sector spending to GDP (65%) in the world.

Both the left and right-wing candidates going into the second round of the French presidential elections have indulged in attacks on the European Union’s economic and monetary policies as part of their campaigns.