The reshuffling of Prime Minister Alain Juppe's Cabinet on Nov. 7 highlights the new fiscal austerity in France.

The Cabinet changes cut the number of members to 32 from 42, but left key ministers in place. The move killed rumors of Juppe's departure and bolstered his hand for the tough spending cuts ahead. President Jacques Chirac recently made a priority of cutting the budget to reach the Maastricht goal of a public deficit equal to 3% of gross domestic product by 1997, from 5% now.

The promised austerity has made way for lower rates. On Nov. 2, the Bank of France cut the rate on 24-hour emergency loans to 6.6% from 7%, and on the next day, it cut the call money rate to 6.19% from 6.25%. After the reshuffling, the BOF cut the call money rate to below 6%, with more easing expected.

The BOF was able to lower rates because of the rising French franc. The franc had lost ground over budget worries as well as fears that the Paris housing scandal would force Juppe to resign. Since late October, though, the franc has strengthened by 1.8% vs. the German mark (chart).

The rate cuts--if they stick--will help the French economy. The latest data on housing starts and consumer spending and confidence show that demand is slowing. Unemployment increased by 28,200 in September, to 2.95 million, while the jobless rate rose unexpectedly to 11.5% from 11.4%. Moreover, an October industry survey showed a fall in business confidence. Third-quarter output grew faster than demand and the resulting inventory imbalance is subtracting from growth this quarter. Real GDP grew at a 1.6% annual rate in the second quarter, but growth likely will be below that in the second half.

Even before the Juppe shakeup, the next few weeks were considered critical for fiscal restraint. The government must negotiate new contracts with its civil-service unions and force controversial cuts in social-security benefits. Those moves will be much more difficult than reshuffling Cabinet portfolios.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE