The prime minister Jean-Marc Ayrault made it official last week when he appeared on public broadcaster France 3's news bulletin. France would “not exactly” meet its 2013 objective of getting the public deficit down to 3% of gross domestic product, he conceded. This is despite the fact that the government itself has insisted that it must and would meet this target.
The reason is that there has been virtually zero growth in the French economy throughout 2012, according to the latest information from the official statistical agency Insee. The risk of a new recession over the next few economic quarters has not been ruled out, either.
No one had been under any illusion, and certainly not in the higher echelons of the state. Though officially the president François Hollande and the prime minister had made a 3% deficit an inviolable objective, some months ago their advisers were already talking about a figure closer to “3.5%”. Certain leaders in the ruling Socialist Party, such as the president of the National Assembly Claude Bartolone, have let it be known that the 3% target, which he judges “untenable”, should not become a political fetish.
For the moment the authorities in Paris are in talks with Brussels about obtaining a little leeway regarding the 3% target. In April the government will present its “trajectory” in relation to public finances to the French Parliament. New austerity measures are predicted. The Left of the Socialist Party may be calling for an end of the 3% objective and a end to “an accelerated reduction in public deficits” which, in a depressed economic context, lead “inexorably to general austerity”. But the 3% dogma is enshrined in European treaties. Below is a short history of a figure that has become a millstone.
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It's a mantra. Whether it's Brussels, Paris or Berlin the leaders swear by just one figure and its miraculous qualities: 3%. Enshrined in European treaties, it requires that the EU states bring their public spending deficit into line at 3% of gross domestic product (GDP), the wealth produced by a country. And too bad if today the target forces countries to carry out drastic austerity measures. And too bad, also, if it is subject to more and more criticism from economists, for no head of government will question the figure in public. Yet this ratio of deficit to GDP is just an arbitrary construction born under François Mitterrand (French president from 1981 to 1995) and then enshrined in the Maastricht Treaty.
The year is 1981. The Left has just come to power in France and, suffering from an oil price crisis, the country finds that its public accounts are in the red. At the Elysée, the president's official residence, the new ministers take it in turn to come to Mitterrand to seek his approval and win extra funding for their department. The first socialist president of the Fifth Republic no longer knows which way to turn and so asks for help from the Finance Ministry led by Jacques Delors (Minister for the Economy) and Laurent Fabius, the current Foreign Minister who was then Budget Minister. According to one witness to the scene Guy Abeille, the top civil servant at the Finance Ministry at that time, President Mitterrand asked for “a simple, practical rule but one that is sanctioned by an expert and thus cannot be challenged, that he will easily be able to brandish in front of the most hard-headed of his budget-consuming visitors”.
A night's work later, and a formula was found and a rate was attached to it: 3%. “It took no time. We looked at what was the most recent forecast for GDP made by [statistical agency] Insee for 1982,” says Abeille. “We factored into our calculation the spectre of the 100 billion deficit that was looming over our office for the budget we were preparing. The relationship between the two wasn't far off 3%. Three percent is good: it has no other basis than those circumstances then, but it's good.”
But a year later, in the middle of a shift towards austerity, this threshold became an immutable rule. “[Jacques] Attali [editor's note, the economist and writer, then a young adviser to Mitterrand] said that we had to stop the deficits from getting out of control and Mitterrand said 'The limit is now 3%',” says Jean Pisani-Ferry, the director of the Bruegel think tank and former adviser to Dominique Strauss-Kahn when the latter was a minister at the Finance Ministry.
'A rough calculation'
The story doesn't stop there. Ten year later the EU member states were in the middle of negotiating the Maastricht Treaty, which heralded the single currency, for which they wanted to fix the rules of conduct (the well-known 'convergence criteria'). This was especially true in respect of budgetary discipline, a subject dear to the heart of the Germans. Berlin wanted a threshold and, even if it had to give way, Paris preferred that this be “its” figure.
“The idea of a rule about good management is perhaps a German one, but it is common sense. As for the figure, that was of French origin,” recalls a French negotiator from that period. But, ten years after the change of direction towards austerity by the French government under Mitterrand, what did this figure actually correspond to? The complex equation (see in French here) consisted of calculating what maximum deficit (which is the difference between current spending and current income) could guarantee a level of debt (which is the accumulated total of past borrowing made to meet deficits) judged to be acceptable (60% of GDP), with an inflation rate of 2% and growth of 3%. And, miracle of miracles, the figure was: 3%. It was then enshrined in the EU's 1997 Growth and Stability Pact.
“There was no economic foundation for the fixing of this threshold, it was simply a rough calculation that took account both of the level of deficits at the time the Maastricht Treaty was signed and of an inflation target,” explains Guy Gilbert, professor of economic sciences at the institution of higher education the Ecole normale supérieure de Cachan in the southern suburbs of Paris.
One of the ironies of the story is that it was the Germans who were the first to breach this threshold, in 2003. In which they were quickly followed by France. “It was all very empirical, it is rudimentary mechanical accounting,” says Pisani-Ferry. “And as it's arbitrary, the equation is obsolete today. The 3% figure has lost much of its value.” Yet, thirty years after the arrival in power of François Mitterrand, and twenty years after Maastricht, it is, however, still the ultimate fiscal compass for European heads of state.
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English version: Michael Streeter