French Prime Minister Jean-Marc Ayrault launched a solemn appeal to parliamentarians on Wednesday to approve adoption of the European Treaty on Stability, Coordination and Governance (TSCG), a fiscal pact that will require governments to limit their public deficits to 0.5 percent of gross domestic product, after it was approved by his cabinet earlier in the day.
Parliament will begin debating adoption of the treaty on October 2nd, when it will be opposed by a number of leading back-bench MPs from Ayrault’s Socialist Party and also MPs from the radical-left who have denounced what they call a government U-turn on its election promises to soften austerity policies.
But already, to prepare to meet the treaty’s targets, and to maintain relatively comfortable bond market borrowing rates, French President François Hollande has pledged to reduce the country’s huge public deficit to 3% of gross domestic product (GDP) in 2013, down from 5.2% in 2011. To reach this ambitious target, the government has prepared a raft of spending cuts and tax increases worth 30 billion euros, contained in a new public finances law to be presented before parliament on September 28th.
The measures, involving spending cuts worth 10 billion euros and tax increases that will raise an extra 20 billion euros, represent the most severe austerity measures to be introduced in France for 50 years. “The direction is that of recovery for France, [the pace] is a two-year agenda for recovery,” said Hollande when he presented his policy agenda on French television earlier this month.
But a number of leading French economists, including several who publicly supported Hollande’s election campaign, now warn of the potentially catastrophic effects of the tough austerity programme required to reduce the public deficit to 3% of GDP in such a short period. They argue that the policies will further starve economic growth and thereby simply worsen public finances, leading to yet more austerity measures.
“We are indeed now facing the risk of a spiral whereby the budgetary tightening and the weakening of growth feed each other,” co-wrote Jacques de Larosière, former Managing Director of the International Monetary Fund, a former governor of the Bank of France and now president of a European financial services think tank called Eurofi, and Harvard Professor of Economics Philippe Aghion in an opinion article published by French daily Le Monde on August 17th.
That opinion is shared by distinguished French economist Daniel Cohen, a professor at the Ecole Normale Supérieure, member of the French governement’s economic advisory committee, the Conseil d’analyse économique, and who was an advisor on economic policy to François Hollande during his presidential election campaign. Like Aghion, he believes France’s massive deficit must be cut through major structural reforms, but not at the rate and pace demanded by Brussels. “The [EU] commission must clear the table, this deficit ceiling of 3% is far too pro-cyclical,” he commented in an interview with French financial daily Les Echos on September 11th. “When everything is going well, it’s easy to attain, when everything is going badly, it’s impossible. We are in the process of entirely creating an artificial crisis. It is high time to disarm this trap into which we will all collectively fall in 2013.”
Philippe Martin, Professor of Economics at the Paris School of Political Sciences (Sciences Po) was one of 41 economists, including Philippe Aghion and Daniel Cohen, who signed an open letter of support for Hollande during his presidential campaign. While he also argues for the need for important cuts in public spending, he warned that this can only be done effectively over a period of several government terms of office. “This objective of 3% in 2013 is a trap that France has made for itself,” he said. “A budget strategy over ten or 20 years is what is needed, not over two years. Even the financial markets can today understand that such a massive and concentrated austerity plan will have a very negative impact on growth.”
Some among President Hollande’s close advisors, speaking on condition of anonymity, admit that reaching the objective of reducing the deficit to 3% of GDP in 2013 is far from certain. “We’re underway to try and meet our engagements,” commented one, “we’re totally immersed in a tightening of the bolts. After that, we can’t predict whether we’ll succeed.” Another said that Hollande and Prime Minister Jean-Marc Ayrault are already coinvinced that they will fail to meet the target in 2013. “Yes, they’re aware that they won’t get there. They think it will be 3.5%.”
A government minister, who also asked not to be named, told Mediapart that Hollande and Ayrault, under pressure from German Chancellor Angela Merkel, found themselves inextricably bound by the EU objectives, which can only be modified with the support of other countries. “France cannot say, alone in Europe, that it will not follow the objective, that’s impossible,” he said. “We’re beginning to prepare the ground with others.”
That argument was supported by Daniel Cohen, who told Les Echos: “France cannot, today, take the risk of unilaterally crossing the line. The credibility of its signature depends upon that. The debate can only be had at a European level.”
'There must be delicate surgery'
In the short term, France could ease the pressure of reducing its deficit by recalculating it in terms of its structural deficit, less strapped to the immediate see-saw effects of the economy, a move suggested by Philippe Aghion. To justify this, Hollande could refer back to the terms of the Treaty on Stability, Coordination and Governance signed in March by all EU member states with the exception of the United Kingdom and the Czech Republic. The TSCG contains the so-called Fiscal Compact which sets out a ‘golden rule’ that limits the annual structural deficit of governments to less than 0.5 per cent of GDP. Article 3 [1b] of the TSCG says the rule will be deemed as having been respected “if the annual structural balance of the general government is at its country-specific medium-term objective, as defined in the revised Stability and Growth Pact, with a lower limit of a structural deficit of 0.5 per cent of the gross domestic product at market prices”.
The official line from both the presidential and prime minister’s offices is that France will stick to the current terms. “The engagement to return to 3% will be kept, because we cannot, and don’t want to, do otherwise,” insisted a close advisor to the prime minister, who asked not to be named. “Otherwise, eventually, we’ll be in the same situation as Spain. And we’ll have to borrow at rates that will lose us 10 billion euros per year. And here, neither are we preparing a Greek-style savage budget.”
Another official at the prime minister’s office added: "We are convinced that our strategy is good for France, for reasons of credibility and the maintaining of our conditions of access to the markets. Our level of deficit and debt are such that it is now that efforts have to be made.”
The comments meet with agreement from socialist MP Pierre-Alain Muet, an economist by profession and a former government advisor, now vice-president of the French parliament’s finances commission. “I understand the questions raised by the economists, but I still say we need to quickly return to 3% because it is the level at which the debt ceases to explode, and that it is only once the debt has been stabilized that we can apply more balanced economic policies,” he said. Muet cautioned that care must be taken to avoid the knock-on effect of austerity measures depressing the economy. “There needs to be a subtle policy approach, there must be delicate surgery, but it’s possible,” he commented.
However, the government’s path ahead is on shifting sands. Presenting his policy agenda earlier this month, President Hollande announced a downward revision of the forecast for economic growth in France 2013 at 0.8%, a third less than the 1.2% the government had until then be basing its calculations upon. Meanwhile, a number of economic forecasting institutions have predicted the real figure could be as low as 0.3%. If that proves true, to meet its target promised to Brussels, the French government would need to find further savings of about 10 billion euros on top of the 30 billion euros in spending cuts and increased tax revenue already announced for next year in what Hollande called “the most important” budgetary reform in France for 30 years.
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English version: Graham Tearse