French Prime Minister François Fillon unveiled another batch of debt-reduction measures Monday—and in so doing officially removed the word “austerity” from the blacklist of political correctness to which it had been banished. Instead Fillon rehabilitated the term as the weapon capable of preventing contagion of the euro zone crisis from spreading to France–and brandished it in the form of cost cutting worth $26 billion over the next two years, and nearly $90 billion in total savings by 2016. Fillon said the painful steps, just six months ahead of an already uphill general election, had become inevitable, saying the word “bankruptcy” was “no longer an abstract.”
Monday’s measures were announced just three months after Fillon and his boss, conservative President Nicolas Sarkozy, announced an initial cost-cutting (never “austerity”) package worth $16.8 billion in August. It also reflected just how keen Paris had become to halt the spreading flames of Europe’s debt crisis from engulfing France as well. Earlier Monday, market concerns over Italy’s ability to finance its public debt caused short-term borrowing rates Rome pays to shoot to 6.64%–a record high since Italy’s membership in the euro, and agonizingly close to a 7% levels some analysts think could push Italy to default. Similarly, Spain saw the interest rates it pays on new bonds increase last week, marking renewed market concern about Madrid’s financing capacities amid spreading fears sparked by economic and political chaos in Greece.
With rating agencies having already warned they’re reviewing the heavily indebted France’s AAA note, Sarkozy and Fillon are desperate to halt the spread of the euro crisis at French boarders. In delivering his speech Monday, Fillon sought to present the looming pain of the government’s austerity measures as a curative response to growing danger for which the ruling right should be rewarded, not resented. “Voters entrusted us with the mission and duty to get France out of a crisis that would only get worse if we allowed things to continue as they had before…and as previous governments allowed,” Fillon said.
The historical accuracy of that comment—much like the efficiency of the measures Fillon detailed—is the topic of considerable debate already. In addition to Fillon and Sarkozy’s 2007 mandate preceding the current debt crisis, it’s not at all certain the package announced Monday will mark a radical change in seeking to remedy French accounts. In fact, it’s unclear whether the moves are even sufficient to convince markets Paris can resolve its debt troubles.
Among the steps Fillon unveiled was a 5% increase in taxes on companies doing more than $350 million in annual sales; a rise of a discounted value-added tax rate (mostly for services) from 5.5% to 7%; and the implementation of a law voted last year to increase minimum retirement age from 60 to 62 years in 2017, rather than 2018 as planned. Other measures include limiting or reducing certain tax deductions, and setting the rise of most state assistance and stipend payments to 1%. They also involved a freeze on salaries paid to Sarkozy, Fillon, and other cabinet members—a move that already has pundits guffawing. One of Sarkozy’s first moves in office, after all, was to grant himself a 150% pay increase to put the presidential wage on par with that of the prime minister. The result is that even once frozen, Sarkozy and Fillon’s pre-tax pay of over $28,000 per month are more than ten times higher than the average French salary. As such, the freeze is a pretty hard symbol to sell.
Critics say the new corporate tax will be only applicable to larger companies. In many cases, some economists warn, such big outfits may shift production—or their accounting numbers—around to lower both exposure to French taxes, and reduce the benefit of their business activity the French economy enjoys. Some critics also argue that stepping up the increased retirement age to keep older workers on the job longer (and paying income tax rather than pulling pensions) may not help debt reduction, since the entire scheme only produces positive results when unemployment levels have dropped to between 4% and 7%—far below the current 10% rate. Meanwhile, Fillon’s Monday announcement detailed $9.8 billion in new tax receipts for 2012 versus just $700 million in spending cuts. With growth estimates now cut to 1% for 2012 and likely to be lower for 2012, some analysts warn new revenues will be insufficient to offset scarcely diminished outlays, or address the basic causes of France’s debt production.
“Even though it’s never worked before, we see (the government) avoiding significant cuts in spending in favor of the usual old solution of raising taxes, despite France already having one of the highest rates in the world,” Marc Touati, director and chief economist of the Paris-based financial service company Assya, told French TV news channel LCI. “No matter who wins the election, the next government is going to have to undertake new measures not only to deal with existing debt and deficit levels, but face up to falling growth rates.”
Meanwhile, Touati thinks Sarkozy and Fillon lost a chance to capitalize on one of the few opportunities the otherwise dismal task of ushering in austerity ahead of elections held for them: reinforcing their frequent accusations of Socialist rivals being irresponsible tax-and-spend types incapable of dealing with the roots of the critical debt problem threatening France and Europe.
“The (governing) right lost a real chance of distinguishing itself from the left by placing spending cuts rather than new revenues at the heart of its solution,” Touati says. “The approach it took might have some benefit if we were in a time of economic expansion, but these days the growth outlook is dimming. I’m rather skeptical.”