Mr. Sapin Goes to Washington With Hollande’s French Deficit PleaMark Deen
French Finance Minister Michel Sapin arrives in Washington today carrying President Francois Hollande’s message that the time has come to slow the pace of deficit-cutting -- again.
The backdrop to the appeal is the twice-yearly meetings of finance ministers at the International Monetary Fund, which this week said that Europe may need to use budget policy to boost growth that continues to lag behind other parts of the world. The target of the campaign is the European Commission, to which Sapin has to submit plans for the French economy this month.
Since Hollande’s Socialist Party was routed in municipal elections March 23 and March 30, he has named a new government under Prime Minister Manuel Valls and promised to cut taxes for both companies and households. The policy may prevent France from meeting its 2015 deadline for cutting the budget deficit to 3 percent of gross domestic product -- a date that has already been pushed back twice.
“We remain skeptical about the financing” of the promises, said Fabrice Montagne, an economist at Barclays in Paris. Valls has about 20 billion euros ($28 billion) of unfunded tax-cut promises, meaning the French deficit reduction may fall short of Commission targets by the equivalent of about 0.5 percent of GDP, Montagne estimates.
Hollande and Valls are suggesting France’s European partners need to understand its situation. Still, the lack of precision in their plans suggest they have left some wiggle room in talks with the commission. The commission itself is likely to demand an acceleration of changes to the labor market and social system to lift French growth, according to Montagne.
“There’s some gray area in the numbers,” Montagne said. “We’ll be watching their proposals to Brussels very closely. They’ll have to provide sufficient documentation on reforms to show that at least something is getting done.”
Sapin has already won a show of support from Germany, his first stop after becoming finance minister on April 2. German Finance Minister Wolfgang Schaeuble signaled support, saying at a press conference in Berlin that deficit rules must be respected, though there are times when its “somewhat harder” to do and that Germany wants a “strong” France.
Sapin holds a press conference in Washington at 3:30 p.m. local time today. During his stay there he will hold one-on-one meetings with IMF Managing Director Christine Lagarde, European Central Bank President Mario Draghi and European Commissioner Siim Kallas, who is currently responsible for economic policy.
Francois Fillon, who was prime minister between 2007 and 2012 under President Nicolas Sarkozy and is now an opposition lawmaker, criticized the Hollande government’s efforts to seek a fresh delay in meeting the deficit target.
“The message is they won’t be returning to a balanced budget in the short term,” Fillon said on RTL radio. Cutting the deficit “is difficult but we’re going to have to do it. We have to do it before we’re forced to. Every month that passes brings us closer to the moment when we’ll have to cut spending under pressure from the markets.”
France’s deficit was 4.3 percent of gross domestic product in 2013 instead of the 4.1 percent target set in September, national statistics office Insee said on March 31. The 4.1 percent goal had already been watered down from the 3.7 percent 2013 deficit promised in April last year.
For now, markets are not reacting.
France currently pays an interest rate of about 2.04 percent to borrow for 10 years, compared with 1.54 percent for Germany. That puts the spread with Germany at about 50 basis points, down from 72 basis points in late January.
Investors are also unlikely to punish France once the deficit-cutting delay becomes official, according to 12 out of 15 economists surveyed by Bloomberg News.
“There has already been quite some effort made from the French authorities to lower expenditures,” said Martin Janicko of Moody’s Analytics. “And in general, the sovereign debt crisis is easing in the euro zone.”