France Needs $43 Billion to Meet Debt Targets — but Rejects Austérité

French auditors reveal a $43 billion funding shortfall for 2012 and '13, forcing Socialist President François Hollande to shift his focus from progrowth efforts to measures that look a lot like austerity he criticized elsewhere

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Thomas Samson / Pool / Reuters

France's President François Hollande

France’s progrowth President is about to become its cost-slashing head of state. But, with respect to French political tradition, don’t call it austerity.

Less than a week after he delivered on promises to push through stimulus programs for the debt-mired economies of France and the European Union, French President François Hollande began focusing his efforts — and public attention — on what’s sure to be seriously painful domestic belt-tightening. On Monday, France’s independent Court of Accounts delivered a Hollande-commissioned audit of state finances, revealing that his Socialist government will need to fill a funding gap of around $43 billion over the next two years in order to meet its E.U.-mandated deficit-reduction targets. No one had any illusions about what that means. Still, there was a refusal to use that painful word. “There’ll be tax increases, there’ll be spending cuts, but I reject any talk of austerity,” Finance Minister Pierre Moscovici told news station i-Télé on June 25. “We must avoid a budget policy that hurts economic activity.”

With no little schadenfreude, Tuesday’s headline of the militantly partisan conservative daily Le Figaro announced: “The Court of Accounts Sounds the Alarm.” “Who Will Pay?” leftist paper Libération asked in a clearly rhetorical question.

Indeed, according to Didier Migaud, the Socialist president of the Court of Accounts, the audit makes it evident that everyone in France must painfully pay up to fill the massive shortfall in funding his audit has uncovered. “It will require an unprecedented brake on spending, and higher taxes,” Migaud says, warning that any attempt to forestall the looming crunch will imperil France’s “economy and public finances, and [could open] the possibility of debt spiral.”

About the only upside in that announcement for Hollande and fellow Socialist Prime Minister Jean-Marc Ayrault is that both men knew the bad news was on the way. One of Hollande’s first moves was to order the audit of state accounts to examine what he suspected had been excessive, unfunded pre-election spending by his conservative predecessor, Nicolas Sarkozy. But while that gave Socialists a culprit to point at, Monday’s findings made it clear the real problem in France’s financial mess is falling state revenues amid stymied economic activity. And since that’s not likely to improve soon, it makes slashing outlays an obvious and urgent move.

The study said French leaders must find between $7.6 billion and $12.5 billion in new income or savings to reduce France’s 2011 budget deficit representing 5.2% of GDP to the promised 4.5% this year. More formidable still, auditors predicted a $41.6 billion shortfall in Hollande’s plans to slash the 2013 budget deficit to 3%. That effort will become tougher still if growth forecasts are further revised downward from their current 0.4% for 2012, and 1% in 2013. As it stands, France’s current debt level — representing 89.3% of GDP — is set to surpass 90% by year’s end, possibly bringing Paris under the same kind of lending pressure from bond markets that have pushed Italy and Spain’s financial situation to the breaking point.

Fortunately, Hollande never hid the fact that austerity was inevitable in facing the crisis — even if he and his Cabinet now refuse to use the A word to describe looming cuts. As he told TIME in a campaign interview, Hollande has called raising taxes and cutting spending unavoidable in addressing the debt problem. His caveats, however, are that belt-tightening must also be accompanied by efforts to nurture revenue-generating growth — and that the pain of sanitizing public finances be shouldered by France’s wealthiest in a way he says it was not under conservative rule. “People must see that while the collective effort may be long and difficult, it’s going to be fair — and involve everyone,” Hollande told TIME. “People from all backgrounds and political positions are willing to contribute for services and protection of society as a whole — but on the condition that money is being spent effectively and that everyone is paying their part.”

Many French political analysts believe Hollande and his government will emphasize increasing taxes on the affluent and companies within broader efforts to lift income and cut spending across all sections of society. Perhaps as a precursor of that strategy, Hollande has ordered an overall freeze on state spending this year and deep cuts in some ministries, even as he confirmed promises to create 100,000 new jobs in areas like police forces, social services and education. By giving to targeted areas with one hand and taking away even more generally with the other — and demonstratively pinching the rich all the while — Hollande’s government is looking to reap the curative benefits of austerity without admitting to having embraced it.

The attentiveness to public purchasing power — and Hollande’s pledge to distribute the tax agony fairly — is why his government is thus far refusing the audit’s urging to nudge France’s value-added tax rate up from its current 19.6%. The same thinking is behind its rejection of increasing a payroll tax used to finance the state health care system’s deficit — an item past French governments repeatedly boosted in times of need. And little wonder why: the audit predicts that a 1% rise in that specific payroll duty would generate $14.6 billion in new revenues alone.

But for now, Hollande and his government are sticking to their progressive guns — though that determination will likely be tested soon. Migaud says enduring restoration of French financial health can only result from longer-term state-spending reductions. A main priority in that, the audit says, will be cutting the number of employees in France’s public sector, which currently produces one of every five jobs. Hollande has already planned a moderate thinning of those ranks, though those measures — already criticized by unions — will doubtless need to be expanded as the debt crisis rages. If so, Hollande may eventually be forced to sing a full-throated ode to austerity, unless his European efforts to stimulate economic growth prove more productive than most observers are betting on.

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Firozali A.Mulla
Firozali A.Mulla

I do not think we are moving

anyway. We are there where we started. Many central banks worldwide acted this

morning in an attempt to jump-start the stagnant economy. The People's Bank of

China, European Central Bank, Central Bank of Kenya, and Bank of Denmark all

cut rates. In addition, the Bank of England announced an additional 50 billion

pounds of asset purchases. US markets were little changed despite all of the

news, and the Samp;P 500 finished the day slightly lower. Initial jobless

claims came in at 374,000, which was 14,000 less than last week's number and

12,000 less than expected. The ADP jobs report came in significantly

better than expected. Analysts looked for private payroll to rise 95,000 and

the report came in at 176,000. The ISM non-manufacturing index report was

disappointing. The index level came in at 52.1, falling short of the 53.0 that

was expected. However, this was higher than Monday's ISM manufacturing index,

which fell into recessionary territory at 49.7. Swiss CPI will be

released at 3:15 a.m. EDT tomorrow. The Consumer Price Index is expected to

change -0.3% month over month. British PPI will be released at 4:30 a.m. EDT

tomorrow morning The month to month change for both input and output is

expected to be negative. The monthly jobs report will be released at 8:30 a.m.

EDT tomorrow morning. After last month's abysmal report, investors will be

looking for significant improvement. The estimated increase in nonfarm payroll

is 95,000 compared to last month's gain of 69,000. Since the world adopted Basel I in 1988, it has allowed the Europeans to

dictate the bank capital regime for major industrial economies.  We are

now in the process of adopting Basel III capital rules.  Unfortunately,

these rules have so biased the financial system that the private sector, the

engine of job creation, has all but been squeezed out. Under all of the

Basel regimes, "sovereign" debt is considered riskless. 

Everything else has a varying degree of risk to it which requires a capital

reserve.  Loans to the private sector have the highest capital

requirements.  Americans have always viewed our US Treasury debt as

"riskless."  So, on the surface, it appears reasonable that no

capital should be required, and Americans think no further.  But, further

thought would reveal two significant issues: 1) The "sovereign" debt

of other countries may not be riskless (ask the private sector holders of Greek

debt, or Jon Corzine and MF Global (MFGLQ) folks about the risks associated with Italian debt); 2) The bias

imparted with this sort of capital regime makes loans to the private sector

unattractive, especially in times of economic stress where bank capital is

under pressure.  But, it is in times of such stress that loans to the

private sector are needed to create investment, capital spending, and jobs. We have heard the politicians in Washington rail against the banks for

not making loans to the private sector.  Yet, all of the rules,

regulations, and enforcement processes make it difficult, if not impossible, to

do just that.  The overbearing regulatory process strangles private sector

lending at small community banks.  And, as indicated above, the capital

regime itself, which impacts all banks, discourages private sector loans. 

For example, a $1 million loan to the private sector requires $200,000 in

capital backing plus an additional $20,000 to $30,000 in loss reserve

contribution from the capital base.  That same $1 million loan to the US

Treasury, via purchases of Treasury securities, requires no capital or reserve

contribution.  The ultimate result is that, since the financial crisis

when western governments found out that it was politically okay to "save"

(i.e. recapitalize) large banks with public monies, they also found out that

the capital and regulatory regime now made those same banks major buyers of

excessive government debt. Unfortunately, while governments like this and will

continue to promote it because it keeps the cost of borrowing low and provides

them with a ready market for deficit spending, government is not the economic

engine.  That is what the private sector is.  Simply put, the banking

model in the west now promotes moral hazard (banks making bets that are

implicitly backed by taxpayers) and Too Big To Fail (TBTF) policies while it

stifles private sector lending.  The Dodd-Frank legislation has

institutionalized this model with government intervention now seen as the first

response to a banking issue.  If it hasn't, then why did President Obama

say on The View the

business day after JPMorgan Chase (JPM) announced its trading

loss that it was a good thing that JPMorgan had a lot of capital else the

government would have had to "step in."  Or why has Jamie Dimon,

JPMorgan's CEO, been required to testify before both House and Senate

Committees about a loss of less than 3% of the bank's $190 billion capital

base?  As further proof of government control of the banking system, the

FDIC recently announced that, under its Dodd-Frank mandate, it is ready

to take over any

TBTF institution, "when the next crisis occurs."  Isn't it clear

that the relationship between the US federal government and the banking system

is unhealthy, perhaps even incestuous, to the detriment of the private sector?

 That very same banking model is emerging in Europe with the emergency

funding by the European Financial Stability Fund (EFSF) to recapitalize the

Spanish banks and talk of a pan-European

regulatory authority and deposit insurance I

thank you Firozali A.Mulla DBA

Firozali A.Mulla
Firozali A.Mulla

What has happened politically, economically,

culturally and socially since the sea change of the late ’60s isn’t

contradictory or incongruous. It’s all of a piece. For hippies and bohemians as

for businesspeople and investors, extreme individualism has been triumphant.

Selfishness won. From the beginning, the American idea embodied a tension

between radical individualism and the demands of the commonweal. The document

we’re celebrating today says in its second line that axiomatic human rights

include “Life, Liberty and the pursuit of Happiness” — individualism in a

nutshell. But the Declaration’s author was not a greed-is-good guy:

“Self-love,” Jefferson wrote to a friend 38 years after the Declaration, “is no

part of morality. Indeed it is exactly its counterpart. It is the sole

antagonist of virtue leading us constantly by our propensities to

self-gratification in violation of our moral duties to others.” Periodically

Americans have gone overboard indulging our propensities to self-gratification

— during the 1840s, during the Gilded Age, and again in the Roaring Twenties.

Yet each time, thanks to economic crises and reassertions of moral disapproval,

a rough equilibrium between individualism and the civic good was restored. Consider

America during the two decades after World War II. Stereotypically but also in

fact, the conformist pressures of bourgeois social norms were powerful. To

dress or speak or live life in unorthodox, extravagantly individualist ways

required real gumption. Yet just as beatniks were rare and freakish, so were

proudly money-mad Ayn Randian millionaires. My conservative Republican father thought marginal income tax rates of 91 percent were unfairly high, but

he and his friends never dreamed of suggesting they be reduced below, say, 50

percent. Sex outside marriage was shameful, beards and divorce were outré — but

so were boasting of one’s wealth and blaming unfortunates for their hard luck.

When I was growing up in Omaha, rich people who could afford to build palatial

houses did not and wouldn’t dream of paying themselves 200 or 400 times what

they paid their employees. Greed as well as homosexuality was a love that dared

not speak its name. We have had it once we have had twice now how many times we

will have only the ones who led or mislead us we will know. I thank you. We

have no leaders that is it.

In the face of suffering, one has no right to turn away, not to see. -Elie

Wiesel, writer, Nobel laureate (b. 1928) I thank you Firozali A.Mulla DBA




Firozali A.Mulla
Firozali A.Mulla

Obama: ‘Let’s Win the Damn Election I detest this phrase. What exactly

is it? Just winning and that is all? I love this mud slinging

after the years we hade the fall. We had A LOT OF TIME TO GO WELL ON THE RAILS

OF THE GOOD ECEONOMY, WE MISSED THE chance NOW WE Tell tales. At last we have

come to a stage when we have to vote to say where we stand. "There is more

to come - further moves, probably further treaties - where we can take forward

our interests, safeguard the single market and stay out of a federal Europe. He

acknowledged that the country's position within an evolving European Union must

have "the full-hearted support of the British people". He insisted that the vast majority of the

public did not support an immediate referendum on whether Britain should be in

or out. Nearly 100 Conservative MPs have written to Mr. Cameron urging him to

make it a legal commitment to hold a poll on the EU during the next parliament

but Mr. Cameron was cautious about how the issue would be put to people. He

said: "There is more to come - further moves, probably further treaties -

where we can take forward our interests, safeguard the single market and stay

out of a federal Europe. "How do we take the British people with us on

this difficult and complicated journey? How do we avoid the wrong paths of

either meekly accepting the status quo or giving up altogether and preparing to

leave? "It will undoubtedly be hard going, but taking the right path in

politics often is. "As we get closer to the end point we will need to consider

how best to get the full-hearted support of the British people, whether it is

in a general election or a referendum. "As I have said, for me the two

words 'Europe' and 'referendum' can go together, particularly if we really are

proposing a change in how our country is governed, but let us get the people a

real choice first." Mr. Cameron's article in the newspaper comes after an EU

summit called

to tackle the Eurozone crisis moved the bloc towards closer ties. After the

meeting, he told reporters he was not in favour of an in/out referendum leading

some to believe he was ruling out a popular vote altogether While all talk on the

working of the bank snow? You can trace the start of the crash back to the

late seventies when 'bankers' started to become salesmen. I would love to know

how many of today's bankers actually have a banking qualification. I thank you Firozali A.Mulla DBA


The French will just demand this money from Germany, like Greece and Spain have done.


France as big state government spending as part of its national DNA. Hollande is a fan of big govt spending, and high taxes, so basically all budding French entrepreneurs will head for the airport to the UK, and the French public sector will remain over staffed and bloated. 

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...This will probably happen to the US soon enough. Unfortunately the burden will be passed onto working citizens for careless government spending. Sigh.


It already is happening.  The difference is that we don't have treaty obligations that will compel our government to deal with the mess until they further compound the problems.....