French Prime Minister Alain Juppe has a tough task: to convince financial markets that the 1996 budget he announced on Sept. 20 will trim the central-government deficit from a 1995 target of 322 billion francs ($63 billion) to 290 billion francs, and that the social security gap will fall by 30 billion francs.

So far, the markets aren't buying it. The government is already overrunning its '95 target by 20 billion francs, making the '96 target that much harder to reach. Plans to tackle the social security deficit are still fuzzy. And the economy is weakening, so the government's annual growth projections of 2.9% this year and 2.8% next year look unattainable. As a result, investors are demanding an ever-widening premium to own French bonds. The yield on 10-year government bonds on Sept. 20 was 82 basis points greater than 10-year German bonds.

Real GDP in the second quarter rose at a quarterly rate of 0.4%, down from 0.7% in the first quarter and 0.9% in the fourth. Exports have slowed sharply, the result of weaker growth in France's trading partners--notably Britain and Germany. But domestic demand is not taking over as the economy's growth leader, as had been hoped.

More softness is likely. Consumer spending, which surged last quarter amid a rush to cash in on government sales incentives for cars, is flagging in the third quarter, especially car buying. And the Aug. 1 value-added tax rate hike will hurt spending generally.

Business investment, a key contributor to growth, fell in the second quarter, suggesting that companies are cutting their capital-spending plans. Government demand, which in the second quarter posted the largest increase in nearly three years, will fall off sharply if Paris intends to hold the growth in 1996 outlays to 1.8%, less than the projected 2.2% rate of inflation.

Analysts believe that the ambitious 1996 budget is at least a step in the right direction. And with lower German interest rates likely, the Bank of France has the leeway to cut rates further.

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