Sarkozy Grapples With ‘Politically Unacceptable’ Cuts

French President Nicolas Sarkozy
French President Nicolas Sarkozy delivers his speech during an inauguration in Metz, eastern France, on May 11, 2010. Photographer: Lionel Bonaaventure/AFP/Getty Images

French President Nicolas Sarkozy’s popularity fell to its lowest since his 2007 election last month. Worse may lie ahead as he cuts spending and raises taxes in the wake of Europe’s financial crisis.

Sarkozy risks increasing voters’ ire two years ahead of presidential elections as he strives to meet promised deficit- reduction targets and pacify investors. The choices include the politically sensitive areas of lifting the top tax rate and tightening pension requirements. Sarkozy met local government officials in Paris today to discuss deficit cuts.

“Austerity is economically necessary but politically unacceptable,” said Laurent Dubois, a professor at Paris’s Institute of Political Studies. “But he has no choice, the debts are too heavy.”

The dilemma facing the French leader, who took office three years ago this week, underscores the bind facing European Union politicians, whose response to the Greek debt crisis prompted them to pledge reductions in their deficits and public debt.

Sarkozy has said he will cut France’s deficit to 3 percent of economic output in 2013 from 8 percent now. His reliance on a spending freeze, economic growth and a pension overhaul will get him only partway there, according to Samuel-Frederic Serviere, a researcher at Ifrap, a Paris-based group that monitors government spending.

Triple A

“With just the measures that have been announced, at best we’ll get the deficit down to 5 percent by 2013, and that’s in the best of cases,” Serviere said. “What they’ve announced so far just isn’t sufficient given our European engagements.”

As investor concerns about Europe’s creditworthiness sent borrowing costs soaring in Spain and Portugal this month, France benefited from its triple-A credit rating and the perception that along with Germany it is among the world’s safest sovereign borrowers. Yields on French 10-year bonds reached the lowest since at least 1990 today, falling to 2.97 percent.

Still, France’s budget deficit as a percentage of its economy is only exceeded in the euro area by those of Ireland, Spain and Greece. Its debt load of 77.5 percent of GDP last year is the fifth-largest in the 16-member region.

The official forecasts imply that public spending will grow by a maximum of 1.7 percent annually in each of the next three years, in line with inflation, according to Pierre-Olivier Beffy, chief economist at Exane BNP Paribas in Paris.

Austerity Plans

“The French government has never undertaken to cut costs to such an extent since the war,” he said. “The rating agencies all acknowledge that France has strong economic potential but are concerned about the country’s failure to balance its budget since 1975.”

Since the euro region agreed to a 750 billion-euro ($927-billion) support package on May 10 to end its sovereign debt crisis, Spain has pledged to lower public wages by 5 percent this year and suspend an increase in pension payments. That will bring its deficit down to 9.3 percent of output this year.

Portugal announced pay cuts for top government officials and tax increases to keep its deficit at 7.3 percent of gross domestic product this year and lower it to 4.6 percent next year. France projects a deficit of 6 percent of GDP in 2011.

German Chancellor Angela Merkel said in an interview published May 18 in Paris-based Le Monde newspaper that Germany and France have to “show the way” in holding back their deficits.

Pension Overhaul

Sarkozy’s approval rating was 37 percent in a CSA poll for Le Parisien published May 6, though that was up 3 percentage points from his record low the previous month. CSA phoned 855 people for the poll. It didn’t give a margin of error. That compares to a post-election high of 61 percent in a September 2007 CSA poll.

Sarkozy is pinning most of his efforts on cutting losses in the pension system and showing voters that he has secured their retirement, said Dubois.

Because of public opposition, he has already abandoned initiatives including a tax on carbon, and scaled down or left unimplemented promises to simplify labor laws, trim layers of local government and speed up the justice system.

Undermined by longer life expectancy and higher unemployment, the state pension fund had a shortfall of 10.7 billion euros this year, up from 8.2 billion euros last year and 5.6 billion euros in 2008, the government estimates. The gap will rise to 14.5 billion euros in 2013 and 50 billion euros in 2020, the Budget Ministry said.

Retirement Ruckus

Sixty-six percent of the French say there is a risk of the system failing, with 28 percent saying the risks are exaggerated, according to a CSA poll in Paris-based La Tribune May 18.

Labor Minister Eric Woerth is negotiating with union and business leaders over a combination of longer working lives and new taxes for the wealthy. He’s ruled out cutting pension payments or raising taxes across the board.

Union leaders say they won’t accept any change to France’s legal retirement age of 60 and have called a general strike for May 27. The opposition Socialist Party is also defending retirement at 60 and says higher taxes will plug the deficit.

To cut the deficit, Sarkozy today reiterated that ministries will have their budgets frozen for three years, spending will be cut by 10 percent over three years by not replacing one of every two retiring civil servants, and that all discretionary government spending will be “re-examined.”

He also said he will seek a constitutional amendment to specify binding budget-deficit limits.

These measures are insufficient, said Ifrap’s Serviere. Finance Minister Christine Lagarde said today that the government should consider increasing taxes on capital and on the high earners.

“Any massive increase in taxes will be bad for growth,” Lagarde said on RTL radio before the meeting on deficit cuts. “But there may be annoyances for some. When you have to cut spending, you have to look in the back of every drawer.”

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