Sarkozy Proposes Biggest French Deficit Cut in Two Decades
France's President Nicolas Sarkozy
Michele Tantussi/Bloomberg
Nicolas Sarkozy, France's president.
Nicolas Sarkozy, France's president. Photographer: Michele Tantussi/Bloomberg
Sept. 23 (Bloomberg) -- Marie Diron, an economic adviser to Ernst & Young, talks about the outlook for the French economy including the possibility of pension reforms and austerity measures. She speaks with Andrea Catherwood on Bloomberg Television's "The Pulse." (Source: Bloomberg)
President Nicolas Sarkozy’s government outlined France’s biggest budget-deficit cut in two decades to calm investor concerns and protect its top credit rating.
The government shortfall will drop to 92 billion euros ($125 billion), or 6 percent of gross domestic product, next year from 152 billion euros, or 7.7 percent, the Budget Ministry said today. The reduction stems mainly from the end of recession-fighting stimulus and one-time investments. Tax revenue and spending will remain virtually unchanged.
“The investors who finance our debt are paying close attention to our deficit plans,” Finance Minister Christine Lagarde told journalists in Paris. “We will do what it takes” to achieve the fiscal target.
Sarkozy’s budget may still leave his country trailing its euro-area peers in repairing national finances after the debt crisis. France’s deficit may exceed that of Germany, Italy, Belgium and the Netherlands just as Sarkozy is gearing up for an election in early 2012.
French government bond yields may increase relative to benchmark German bunds because the nation isn’t willing to enact austerity measures, Nomura International Plc said today.
“France’s reluctance to pursue deep spending cuts and heavy tax rises could lead to spread widening in the medium term,” a team of analysts led by Nick Firoozye in London wrote.
French Spread
In the wake of Europe’s sovereign debt crisis, investors have punished countries that failed to fix their finances. The premium France pays to borrow for 10 years compared with Germany was 37.9 basis points today, down from 55.6 basis points on June 8. Both countries have Aaa credit ratings.
France aims to keep the spread at the “low end” of the recent range, Lagarde said today.
Among the 16 euro-area countries, Ireland and Greece will have bigger deficits than France next year, while Portugal and Spain will be at about the same 6 percent level, Barclays Capital estimates. Germany will have a shortfall of 3.5 percent of GDP, while Italy, the Netherlands and Belgium will have deficits of 4.7 percent, 4.1 percent and 4 percent, Barclays said.
Moody’s Investors Service said Aug. 17 that France is well positioned to preserve its top rating, though, like its peers, it must retain market confidence.
‘Debt Dynamics’
“Debt dynamics have become more sensitive to market confidence,” Moody’s said. The “tailwinds” that are keeping borrowing costs down depend on credible budgets, Moody’s said.
Reaching the deficit target depends on economic growth of 2 percent next year, up from an expansion of about 1.5 this year. The budget assumes an inflation rate of 1.5 percent.
“We’re really quite confident in the growth forecast, there is no soul-searching about it,” Lagarde said.
The biggest savings will come from a drop in one-off expenses to 2.9 billion euros from 70.5 billion euros. This includes the end of fiscal stimulus put in place to fight the recession and last year’s “grand loan” investment plan, which won’t be repeated. The government will also freeze its running expenses at 275 billion euros.
“The limited scale of the planned savings does not give a lot of protection against any shortfall,” said Gilles Moec, an economist at Deutsche Bank AG in London. An “acceleration in the growth pace is unlikely,” he added.
U.S., U.K.
To be sure, France is far from a basket case. Its 2011 deficit will be less than the 8.3 percent of GDP the Congressional Budget Office predicts for the U.S. and less than the 7.5 percent planned for the U.K. in the next fiscal year.
France’s debt will stand at 84 percent of output by year- end, compared with 118 percent for Italy and 99 percent for Belgium, according to European Commission estimates. Germany and the Netherlands will have debt burdens of 79 percent and 66 percent of GDP.
For Sarkozy, whose approval rating is at its lowest since he took office in 2007, the conflicting pressures of the bond market and the electorate leave little room for maneuver. Just 34 percent of voters hold a positive view of his performance, down from 44 percent in January and 67 percent in summer 2007, according to a Viavoice poll taken last week.
Sarkozy is “trapped between a rock and hard place: he says he can’t let the budget and the deficit go adrift, and that he must think about the rating of France,” said Viavoice pollster Francois Miquet-Marty. “Meanwhile he is losing popularity because he cannot respond to the social demand for better care.”
To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net; Helene Fouquet in Paris at hfouquet1@bloomberg.net
To contact the editor responsible for this story: John Fraher in London at jfraher@bloomberg.net; James Hertling at jhertling@bloomberg.net
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