Economic Ennui

French Budget Reform Moving at Snail's Pace

Hollande-Sapin-Macron. Source AP.
Pushing their luck? French President Francois Hollande (l) with Finance Minister Michel Sapin (c) and Economy Minister Emmanuel Macron. Source AP.
  • Why it matters

    Why it matters

    As Europe’s economy stumbles, France violates its own stability plan and breaks the tighter E.U. rules on deficits.

  • Facts

    Facts

    • France’s finance minister wants the European Union to wait until 2017 for the nation’s budget deficit to drop to 3 percent, instead of the end of 2015, as previously promised.
    • Despite failing to meet its financial targets again, France hopes for support from Brussels.
    • The country has shown little sign of adopting structural budget reforms and is vague about hopes to achieve its goals.
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    Audio

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France’s finance minister has been correcting himself a lot recently about the timeline for reducing the country’s budget deficit.

“No, it is not about me asking for more time,” Michel Sapin said in July. On Wednesday, he did exactly that, asking the European Union to wait until 2017 for the French budget deficit to drop to 3 percent, instead of the end of 2015 as the country had promised.

Worse still, its deficit will actually rise this year. The European Union member states are supposed to give their blessing to the delay as well, despite France violating its own stability plan and breaking the tighter deficit rules imposed by the E.U. executive branch.

This is not Mr. Sapin’s only instance of backtracking. Only last week he wanted France’s savings target reduced by decreasing spending by €2 billion ($2.59 billion) less than was promised earlier in the year. But now this is apparently longer the case: “The target remains in place to save a total of €50 billion ($64.63 billion) by 2017 and €21 billion ($27.14 billion) of that sum in the coming year,” was his assurance Wednesday. It was among the arguments he hoped would find a sympathetic ear in Brussels. French media outlets speculated the German government had urged him not to break the savings agreement too.

“We do not want to change the rules, we are not asking for a concession or preferential treatment.”

Michel Sapin, French Finance Minister

Mr. Sapin’s most important argument toward the European Union: “We do not want to change the rules, we are not asking for a concession or preferential treatment.” It is more a case of the whole membership coming to terms with “an economic development like no other in recent history,” with low growth and extremely low inflation. He avoided using the word deflation.

He added that France’s economy would grow, not by 1 percent, but by only 0.4 percent in 2014. Inflation would be about 0.5 percent. The inflation rate affected not just tax revenues, but also savings measures, Mr. Sapin said. The effect would be about €2 billion ($2.59 billion) less in state coffers than expected. “To make up for this, we will adopt further measures,” he said.

He would submit details in a few weeks at the same time as the draft budget. But he wasn’t thinking of greater savings “because then the country would be engulfed by austerity and growth weaker still.”

Despite failing to meet its financial targets again, Paris was hoping for support from Brussels. Mr. Sapin’s advisers pointed out the government has “a clear economic policy” in the form of structural reforms to increase competitiveness.

“Despite the difficult situation, we have kept reductions in taxes and contributions for companies amounting to €40 billion ($51.7 billion) by 2017,” he said, which would improve the competitiveness of the French economy, adding that companies’ profit margins were beginning to increase for the first time in years.

Reducing taxes for private households is another component of financial planning of course. This year, private taxpayers in France are to be unburdened to the tune of about €1.5 billion ($1.94 billion) and in 2015 by about €3 billion ($3.88 billion). This tax reduction “on credit” was decided by the government as a way to secure a majority in their own socialist faction, for the reduction in companies’ labor costs.

Whether Brussels will see this purely politically motivated initiative in a positive light or not, against a background of the escalating debt problem, is an open question.

Another is the assessment by Jyrki Katainen, the European Commission’s interim economics commissioner and future vice president, of the structural reforms. For they have not been evident up to now in France.

This article was translated by Bob Breen. Vinny Kuntz also contributed to the story. Thomas Hanke spent many years as a correspondent in Brussels and is  currently based in Paris. Contact the author: hanke@handelsblatt.com

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