France tries to make figures add up in attack on chronic deficits
French government is talking tough about the gaping shortfall in its public finances but its prescription for balancing the books by 2012 remains vague and unconvincing, analysts insist.
PARIS, April 8, 2008 - The French government is talking tough about the gaping shortfall in its public finances but its prescription for balancing the books by 2012 remains vague and unconvincing, analysts insist.
The figures began flying early last week with a statement by Prime Minister
Francois Fillon that a freeze and savings had to be applied across the board
and that "everyone must make efforts."
And since Friday the air has been thick with figures and targets from
Right-wing President Nicolas Sarkozy was elected largely on a platform of
promises to restructure the French economy to raise efficiency and growth and
to reduce unemployment and overspending.
And with France due to assume the six-month rotating presidency of the
European Union in July, the government appears to be scrambling to show it is
serious about its 50.3-billion euro (79-billion-dollar) public deficit.
The public deficit covers spending by central and regional governments as
well as social welfare administrations.
Under the Maastricht Treaty signed 16 years ago to create the eurozone, EU
countries were bound to reduce overspending to 3.0 percent of annual output,
in order to qualify for the euro, and were then move into surplus in times of
France is under mounting pressure from its EU partners after acknowledging
it will be unable to balance its budget until 2012, two years after an
agreed-upon eurozone target of 2010, an extension of previous deadlines.
On Monday the opposition Socialist Party accused the government of
"unnerving the French public by announcing new savings schemes every morning"
and called for a return to "comprehensibility, clarity and truth."
On Friday, Sarkozy unveiled a 166-point cost-cutting plan that he said
would generate 7.0 billion euros in savings by 2011, most of which would come
from replacing only half of retiring civil servants as well as from cuts in
social, diplomatic and defence spending.
It was not clear how much of this would be structural saving to be repeated
in successive years.
The proposal drew sharp criticism from Socialists and the powerful CGT
trade union. Critics described it as a form of austerity that would disrupt
the lives of millions of French people.
But it also failed to impress private economists who said it was unlikely
to eliminate the public deficit by 2012.
"Seven billion euros in savings, when the waste of public funds exceeds 70
billion dollars over the last six years -- it's pretty weak," said analyst
Marc Touati of Global Equities.
At consultants Asteres economist Nicholas Bouzou said Sarkozy's approach
"is far from a true reform in the public sector of the sort that we have seen
in Sweden and Canada."
Starting in 2009 the government wants to limit annual increases in public
expenditure to 1.0 percent, compared with 2.0 percent in recent years, a step
that should yield a gain of about 10 billion euros a year. This figure appears
to include some of the targeted savings already announced.
But Touati maintains that "in 2008 the deficit is already going to hit 3.0
percent of gross domestic product," the upper limit for eurozone members.
And Olivier Gasnier of the bank Societe Generale warned there is now "a
strong possibility that the 3.0 percent limit will be exceeded in 2009."
"There is no chance of eliminating the deficit in 2012," he said bluntly.
France's dilemma, he added, is that while it is under pressure to show its
good faith in its drive to consolidate its public finances, "attacking the
problem of the deficit head-on can only lead to an economic slowdown."
The debate became further muddled on Monday when the budget minister, Eric
Woerth, said France needed to find an annual 10 billion euros over the next
three years in order to balance its books by 2012.
"All I know is that we are going to have to come up with about 10 billion
euros a year, or 30 billion euros in three years, if we want to achieve
balanced public finances" by 2012, he told Europe 1 radio.
Asked about the 7.0-billion-euro figure the government talked about on
Friday, Woerth said: "The announced figure is provisional ... I hope we can
find roughly the same amount between now and the summer."
"The process is under way. We have only looked into a part of the state's
spending," he said.
Woerth had said on Sunday that he wanted to achieve more than 5.0 billion
euros in savings by 2011, in addition to the 7.0 billion announced on Friday.
Reacting to the spate of billion-euro figures of the last few days,
Socialist MP Bruno Le Roux commented: "This shows the totally improvised
nature of the policies of this government, it shows in addition that the
deficits run up by this government must be filled and that it's the French
people, workers and retirees, who are going to pay the price."
The French debt, accumulated deficits which have been rising for many
years, totals 1.209 trillion euros, or about 64 percent of output. The
European Union's preferred level of public indebtedness is 60 percent.
The annual interest payable on this debt, a charge on each annual budget,
was 46.4 billion euros in 2006, equivalent to 15 percent of the central
government budget and the second-biggest item after the cost of running the
national education system.
The essential economic thinking behind the EU deficit rules is that
overspending, particularly to fund current consumption as opposed to
investment, sucks up funds that would otherwise be available for private
investment and tends to push up interest rates.
Also a surplus provides a cushion for countries facing huge costs in coping
with ageing populations, increases the room for stimulus to the economy in the
event of recession and generates funds to reduce the debt.