France struggles as growth flagsWith France’s economy poised on a knife-edge, growth figures for the third quarter due out on Tuesday will be watched with more than usual concern.
President Nicolas Sarkozy’s centre-right government has twice had to introduce emergency budget packages in the last three months in response to flagging growth, the latest unveiled a week ago.
It is caught in a Catch-22: lower growth prompts tougher measures to convince nervous financial markets that fiscal consolidation, aimed at reducing the budget deficit from 5.7 per cent this year to 3 per cent in 2013, will be carried through. But markets fret that the extra savings will further damage what little expansion there is in output.
At stake is France’s triple A sovereign debt rating, which enables France to manage the cost of its large public debt – due to peak above 87 per cent of GDP next year. It also underpins the eurozone’s €440bn rescue fund, the European financial stability facility, which relies heavily on France’s triple A to support its fundraising.
A glimpse of what could lie in store came last week when a mistaken suggestion by Standard & Poor’s, the rating agency, that it had downgraded France boosted already high French bond yields further above benchmark German rates, infuriating ministers in Paris.
With a presidential election looming in less than six months, Mr Sarkozy is also under strong domestic pressure to preserve growth. Taken together, the two emergency packages included additional savings of €18bn in 2012, mostly comprised of marginal tax increases on business designed not to hit consumers in the pocket.
But Michel Sapin, a former finance minister and close supporter of François Hollande, Mr Sarkozy’s opposition Socialist party challenger next April, insisted it would damage growth.
“[The government] is hitting against a wall, the wall of deficits and feeble growth ... this vicious circle is well known: austerity, recession, deficit,” he told the newspaper Le Monde.
The government may come close to hitting this year’s reduced official growth forecast of 1.75 per cent, despite zero growth in the second quarter. Economists say there were signs of improved performance in the third quarter. Latest European Commission forecasts predict 1.6 per cent annual growth for 2011.
But the outlook for 2012 is gloomy. The government has twice adjusted its forecast down to 1 per cent since early August, when it was still predicting 2.25 per cent growth next year. Yet the European Commission’s latest forecast is for just 0.6 per cent. Some private sector economists are predicting recession.
A senior non-political official said circumstances demanded that the government sticks to its fiscal targets. “The need to remain credible is absolutely key because if you lose credibility the market punishes you,” he said.
Critical to the outcome will be whether consumers and business respond to the crisis atmosphere by reining in spending and investment. “It is hard to have a definite view of 2012 because there is so much volatility,” the official said. “But it is easier to regain confidence if you have done whatever is necessary to consolidate the public finances.”
Mr Sarkozy and his ministers are now stressing that France must grasp the issue of structural reform – as the president puts it, to “spend less and work more”. They are targeting France’s huge public spending bill – which at more than 56 per cent of GDP is one of the highest in Europe. But most of the spending cuts in the latest savings package were “backloaded” to later years.
“The lack of front-loading is not exactly what you would want but in an election year it is understandable,” says Laurence Boone, senior economist at Bank of America Merrill Lynch.
She is predicting the economy will shrink next year by 0.6 per cent as consumption and investment are hit by the prevailing uncertainty. In the meantime, the government will be constantly looking over its shoulder at the rating agencies.
“There is bound to be another budget revision after the election. Can France afford to wait six months? Possibly, but it is going to be an uncertain period,” says Ms Boone.
http://www.ft.com/intl/cms/s/0/c6774308 ... z1diIxw07B 
Enviado: 16/11/2012 14:51
