France arrives early to austerity rendezvous

July 4, 2012

By Pierre Briancon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

François Hollande has chosen the early strike option. His government will not wait to embark on the austerity programme needed to take the budget deficit back to three percent of gross domestic product next year. French Prime Minister Jean-Marc Ayrault was expected to detail the pain in his address to parliament on July 3. Public-sectors unions will protest and threaten. But in spite of the likely uproar, fiscal discipline is the easy part. Making the economy competitive again will be much harder.

In his electoral campaign, and in his first two months of office, Hollande gave the impression that his commitment to fiscal discipline didn’t go much beyond lip service. The painful reality check was not expected before the autumn. But after a few meetings with Angela Merkel, and a couple of euro summits, it looks like wisdom has struck. Furthermore, a scathing review of France’s public finances by the country’s top audit court, earlier this week, didn’t leave any room for doubt. Due to slowing growth, France needs to find up to 10 billion euros in extra savings or tax hikes this year, and 33 billion in 2013.

Adding austerity to austerity may not look like a bright idea in France anymore than elsewhere, given the stagnant economy. But the country is a special case because public spending is the highest in the euro zone, at 56 percent of GDP. And as the audit court reports showed, it is also one the most inefficient in major areas like education. Cutting spending is in France a structural reform by itself, not just a fiscal obligation.

Tax hikes are also on the horizon for France to meet its target and reassure markets that it is not the next euro basket case. But beyond that, the country needs competitiveness and growth. Its current account deficit is as preoccupying as its fiscal one, if not more so. To address this, Hollande will need to liberalise services, lower labour costs and reform a growth-hostile tax system. He will find that more difficult than simply plugging holes in the budget, as gaping as they may be.

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