France may pay a heavy price for 37 uninterrupted years of budget deficits. Even after two significant rounds of fiscal tightening in the last three months, the government may fall short of its goal of shrinking the deficit to the euro zone-imposed limit of 3 per cent by 2013. Markets are already impatient with the country’s half-hearted approach to tackling its structural primary budget deficit. They are likely to become harsher if high government bonds yields across the monetary union tip the region’s economy into a recession next year.
Even without a recession, the government should adjust its plans, which assumes one per cent GDP growth in 2012. The European Commission predicts a 0.6 per cent increase, at best. Ironically, euro zone heads decided at their summit last month that budget plans should be based on independent forecasts. France is missing a chance to lead by example. A full-blown recession would make the challenge much greater. France, like all welfare states, has many “stabilisers” in its budget. Higher benefits and lower taxes help soften the economic blow, but add to the fiscal pressure. HSBC reckons that a one per cent decline in French GDP in 2012 would increase the budget deficit from 5.8 per cent of GDP in 2011 to 5.9 in 2012 – and a still too-high 5 per cent in 2013.
French politicians should be preparing for the worst, but they do not seem to take the 3 per cent of GDP target seriously. They are using the April presidential election to play politics rather than to face reality. Nicolas Sarkozy, the unpopular incumbent, doesn’t want to add to his latest austerity plan, and socialist contender Francois Hollande is doing everything he can to avoid mentioning painful options. Both men say they want to keep the country’s triple-A rating; its loss would add up to three billion euros a year to the interest bill, according the chief of the French government’s debt agency. Voters and investors should force the contenders to explain exactly what type of rigour they are thinking about – if only to find out that they aren’t thinking at all.
