Dreaded A-Word Looms in France as Hollande Eyes Deficit Cut

Dreaded A-Word Looms in France as Hollande Seeks Spending Cuts
Francois Hollande, France's president, speaks during a news conference at the French Embassy in Washington,. Photographer: Andrew Harrer/Bloomberg

Francoise, a 64-year-old teacher of French literature in the eighth arrondissement of Paris, says whatever President Francois Hollande chooses to call it, France is in for austerity.

With growth stalling, Hollande -- who pushed back against the austerity measures that German Chancellor Angela Merkel had advocated to tame Europe’s debt crisis -- may need spending cuts on top of planned tax increases to meet his deficit targets.

The election campaigns, both presidential and parliamentary, shielded the French from sacrifices demanded elsewhere in Europe. Now, reconciling vote-winning vows like an increase in the minimum wage with a balanced-budget pledge may bring pain.

“The measures that need to be taken will be austere, unpopular and difficult,” said Dominique Reynie, a professor at Sciences Po in Paris. “Politically, the only way to do that is to say to the population that we’re in a crisis and need to take drastic action.”

The national auditor is due to report on the state of government’s finances on July 2, which will be followed by a new budget on July 4, government spokeswoman Najat Vallaud-Belkacem said today. Hollande’s pledge to shrink the budget gap to 3 percent of gross domestic product in 2013 from 4.5 percent this year and 5.2 percent in 2011 has helped France sell debt at record low borrowing costs.

Home Austerity

“Others are making considerable efforts, sometimes very tough ones for their public opinion,” Hollande said at a press conference today in Rome. “I think we must have a serious budget in France too. Wanting growth is precisely to make sure that a serious budget is not austerity. I am against austerity.”

Many French people say they would like Hollande to start the belt-tightening at home -- in government.

Herve and Annie, a Paris couple in their 40s, would like to see fewer top-level bureaucrats. Marie, a 63-year-old retiree, said Hollande needs to cut politicians’ perks, such as their cars and their staff, before asking ordinary people to tighten their belts. Gregoire, a 33-year-old engineer, says Hollande shouldn’t cut spending on education. They declined to provide their last names.

“The No. 1 domestic issue Mr. Hollande needs to deal with is the budget deficit,” said Dominique Barbet, an economist at BNP Paribas SA in Paris. “Avoiding a budget overshoot this year and coming up with a budget that meets existing fiscal targets is crucial. We expect some tough budgetary tweaking.”

Tough Climate

Hollande cut government salaries by a third at his first cabinet meeting last month, fulfilling an election promise. French ministers will now be paid 9,940 euros ($12,628) a month instead of the 14,200 euros under former president Nicolas Sarkozy.

For its 2013-2015 budgets, the government plans to reduce the number of civil service jobs by 2.5 percent annually, reducing operating costs -- including car fleets -- by 10 percent next year, Le Figaro reported this week, citing an unnamed Budget Ministry official.

Subsidies for non-social-welfare items, such as farming and culture, will be cut by 40 percent, the daily said. A budget ministry official denied the report.

Any spending cuts would come in a tough environment with Europe’s second-largest economy posting zero growth in the first quarter, its unemployment at 10 percent and joblessness at a 12-year high.

Job Cuts

Making matters worse, companies from Air France-KLM Group to carmaker PSA Peugeot Citroen and mobile phone operators plan job cuts to countenance a slowdown in demand and increased competition.

Air France told employees yesterday that it plans to eliminate more than 5,000 jobs from its French workforce as it seeks a return to profitability.

France has lost more industrial jobs than any other European country in the past decade. Its employment rate, which measures the proportion of people with jobs, is lower than Germany, Austria, the Netherlands and Portugal, according to economic think-tank Coe-Rexecode.

Labor unions see companies including ArcelorMittal, Carrefour SA, Peugeot and EON France cutting as many as 45,000 jobs in the months ahead, an estimate that’s “realistic,” according to Labor Minister Michel Sapin.

Hollande is meeting with unions and business leaders on July 9 to broker an increase in the minimum wage, and discuss youth unemployment and reviving French industry.

Austerity Elsewhere

Belt-tightening by France would come as Greece, Spain and Italy struggle under their austerity regimes.

In Italy, the euro area’s third-largest economy, Prime Minister Mario Monti has introduced new property taxes, higher gasoline taxes, raised the retirement age and made pensions dependent on contributions.

In Spain, the government has slashed public wages, increased income taxes and cut spending on services, including education and health care.

With the May 6 presidential elections and the June 17 legislative elections behind them, the French are bracing for some pull back in their way of life.

“Everything is heading toward restraint,” said Sciences Po’s Reynie.

Finance Minister Pierre Moscovici told his counterparts yesterday in Luxembourg that the government would meet deficit targets and improve competitiveness. Opposition lawmakers say Hollande hasn’t prepared the French for what’s coming.

“These targets require a very heavy, difficult effort that we estimate at 30 billion euros in 2012 and 2013,” they wrote in an open letter to Hollande last week. “No one can work miracles.”

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