Sarkozy’s Fight on Debt Crisis May Need French Dimension as Deficit Lags
France's President Nicolas Sarkozy
Georges Gobet/AFP/Getty Images)
France's President Nicolas Sarkozy arrives for the EU summit on July 21, 2010.
France's President Nicolas Sarkozy arrives for the EU summit on July 21, 2010. Photographer: Georges Gobet/AFP/Getty Images)
July 21 (Bloomberg) -- German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed on a joint position to solve Greece’s debt crisis ahead of today's leaders summit in Brussels to stamp out contagion in European bond markets. Owen Thomas reports on Bloomberg Television's "Countdown." (Source: Bloomberg)
French President Nicolas Sarkozy is flying between Berlin and Brussels this week to fight Europe’s debt crisis just as another challenge in shoring up the euro waits for him back home.
France, Europe’s second-largest economy and the second- largest contributor to the region’s bailout funds, is also among its deficit laggards. The nation’s budget shortfall was the sixth-biggest among the 16 countries that were euro members last year. Excluding those now receiving bailout funds, only Spain and Slovakia did worse.
With Greece’s debt crisis threatening contagion across the region, Sarkozy flew to meet German Chancellor Angela Merkel yesterday to discuss the turmoil before leaders meet today in Brussels. The pivotal role he’s seeking to maintain for France, along with a top credit rating, remains tarnished by its budget shortfall and the prospect of a record trade deficit this year.
“On our current trajectory, we’re driving straight into the wall,” said Jacques Mistral, an economist at the Paris-based IFRI research group and member of the French prime minister’s council of economic advisers. “There’s no room to maneuver.’’
The surge in borrowing costs for Italy shows investors are ready to pounce on signs of economic weakness and puts France one step closer to the front line of Europe’s debt crisis. Italian 10-year bond yields rose to a euro-era record exceeding 6 percent this week.
Crisis ‘Worry’
“I worry it will actually move to France,” said David Blanchflower, a professor at Dartmouth College and former member of the Bank of England’s Monetary Policy Committee.
While France has a AAA credit rating and its national debt of 1.6 trillion euros ($2.3 trillion) is on a par with Germany, its budget deficit amounted 7.1 percent of gross domestic product last year. That compares with 4.6 percent for Italy, 9.2 percent for Spain and 3.3 percent for Germany.
Sarkozy, whose five-year term as president ends next May, has repeatedly vowed to meet the government’s commitment to slash the deficit to 4.7 percent next year and 3 percent in 2013. With pressure from investors mounting, Budget Minister Valerie Pecresse said this week that Sarkozy is even willing to drop a pledge not to raise taxes to meet them if necessary.
“We’ll keep this promise, and we’ll keep it whatever the economic circumstances, whatever the growth and inflation rates,” she said July 17. “If necessary, we’re ready to find additional revenue.”
Socialists’ Promise
Even the opposition Socialists promise to improve public finances if they win next year’s election. “We have to balance the public accounts without delay,” said Francois Hollande, the leading contender to become Socialist candidate for president, on the same day that Pecresse tried to reassure the markets.
France’s budget shortfall may remain a challenge for Sarkozy as long as the nation struggles to compete on overseas sales. The nation’s share of European exports has dropped to 12.5 percent in the first five months of this year, down from 15.6 percent in 2000, according to Coe-Rexecode, an economics consultancy that advises the French government.
France’s trade deficit exceeded 7 billion euros in both April and May, more than in any previous month, and is on track to reach a record for this year, according to Michel Martinez, an economist at Societe Generale in Paris. Exports are below their pre-recession level and “the contrast with Germany, which has taken full advantage of the world recovery, could hardly be more striking,” says Martinez.
Twin Deficits
To tackle France’s twin deficits, Sarkozy has started easing labor laws, raising the retirement age, and investing in research and education. Yet he or his successor needs to go further and faster, by limiting increases in the minimum wage, reducing spending on health care and unemployment benefits, and improving its competitiveness, according to economists including Eric Chaney at insurer AXA in Paris.
“France has a real problem,” Chaney, AXA’s chief economist, said in an interview. “If you have competitiveness, you have growth, and the public finances then become very easy to fix. You enter into a virtuous cycle in terms of borrowing costs because markets prefer countries with growth prospects.”
To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net
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