Growth, deficits, welfare:the urgent challenges for a divided France

31st March 2004, Comments 0 comments

PARIS, March 31 (AFP) - Reform of the economy to achieve growth and slash overspending as required by eurozone rules, but without angering an electorate accustomed to high welfare, is the main challenge facing the new centre-right French government expected to be announced later Wednesday.

PARIS, March 31 (AFP) - Reform of the economy to achieve growth and slash overspending as required by eurozone rules, but without angering an electorate accustomed to high welfare, is the main challenge facing the new centre-right French government expected to be announced later Wednesday.

Voter discontent with government spending cuts and economic reforms helped hand the opposition Socialists a landslide victory in regional elections Sunday.

Wednesday's cabinet reshuffle was expected to replace Finance Minister Francis Mer with Nicolas Sarkozy, until now the interior minister, with a brief to boost confidence and stimulate growth, so as to reduce high unemployment and deficits without provocative cuts.

Sarkozy has an image of being a hard-driving, astute politician and communicator with presidential ambitions.

At the interior ministry he has tried to soften a hard-line reputation he had acquired earlier in his career.

The central policy problem facing the country at the moment is widely seen as how to strike a balance between firm action to reduce deficits and the soft touch to avoid mass protests by interest groups.

The huge finance, economics and industrial ministry faces the dilemma of a weak growth and a bulging public deficit in violation of European Union rules.

France, like other European countries, particularly Germany, recognizes that economic restructuring is needed, but in a country long accustomed to a thick cushion of social benefits and state intervention, reform meets with tough resistance.

As a member of the European Union's single currency area, France has felt the pinch of EU budget rules during an economic downturn.

In 2003, the public deficit - notably the balance of the state, social security and local cooperative budgets - expanded to 4.1 percent of gross domestic product (GDP).

It was the biggest breach of the 3.0 percent of GDP ceiling in the 15-state EU.

In addition to an extremely weak economy - GDP rose 1.2 percent in 2002 and 0.2 percent in 2003 - the government blamed the state of affairs on the previous Socialist government.

The public deficit had stood at 1.5 percent of GDP in 2001 and 3.2 percent in 2002

But that explanation of the government, elected in 2002, has lost credibility.

The state budget deficit ballooned from EUR 34.4 billion (USD 42.0 billion) in 2001 to EUR 58.2 billion in 2002 and EUR 61.8 billion in 2003.

In 2003, under the stewardship of Mer, state spending has been stabilized, but the deficit has grown mainly because tax revenues have fallen because growth is weak.

This year GDP is forecast to grow at least 1.5 percent, albeit in a "lackluster" fashion, according to the state statistics institute INSEE.

Few economists believe the government will be able to meet its pledge to the European Commission that it will rein in the deficit to below the 3.0 percent ceiling in 2005.

Posing an immediate problem is the costly French social safety net. The social security budget, which had a surplus of EUR 4 billion in 2001, had a deficit of EUR 9.4 billion in 2003.

A tax reform committee has been given until summer to tackle corporate taxes, which will require a delicate hand in balancing a reduction in business taxes with the maintenance of local cooperatives.

And a privatisation drive is under way, raising the wrath of unions.

On April 8, the cabinet is set to study a law that transforms state energy giants Electricite de France (EDF) and Gaz de France (GDF) into private enterprises.

The issue is socially sensitive for a government concerned about provoking anger in the street.

Unions already have called regional demonstrations against a change in status for EDF and GDF, accompanied by strikes in some cases.

The government is banking on raising nearly EUR 4 billion from privatisations in 2004, including those of airline Air France, engine maker Snecma and airport operator Aeroports de Paris.

© AFP

Subject: French news

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