Austerity May Begin to Toll for France As Well

A big French carmaker makes painful cuts even as it grows increasingly clear that Hollande may have to inflict austerity on France.

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Thibault Camus/AP

Workers of French carmaker PSA Peugeot Citroen demonstrate in front of the factory in Aulnay-sous-Bois, north of Paris, Thursday, July 12, 2012. Struggling French carmaker PSA Peugeot-Citroen is slashing 8,000 jobs in France and closing an iconic site north of Paris. (

Political pushback was fun while it lasted. But just three weeks after European Union leaders agreed to loosen austerity and bail-out conditions in the hopes of allowing debt-swamped members room to stoke their faltering economies, governments across Europe are again struggling to prevent resurgent economic and social adversity from swamping them.

Those challenges ranged from street violence in austerity-groggy Spain, to news from France Thursday that carmaker PSA Peugeot Citroën will be cutting 8,000 jobs–the latest in a rising tide of restructuring by companies fearing prolonged economic sluggishness.

Apart from the job cuts, the carmaker said it was closing a plant north of Paris. It said the move was a response to sales that fell 13% in the first half of 2012, and part of a general reorganization its production and sales strategy to adapt to a shrinking European market increasingly dominated by luxury and ultra-cheap car producers. In explaining the cuts, PSA Peugeot Citroën officials sounded a the same kind of alarmed existential tone that governments like Spain have. Quite clearly, Europe’s dire financial and economic has left virtually everyone in a tight, urgent bind–whether they’re in government or business. “The group is facing a business tsunami in Europe, and we’re in the middle of it,” PSA Peugeot Citroën chairman Philippe Varin said Thursday, as furious union leaders denounced an “act of war” they vowed to avenge. “I’m absolutely determined to see this plan through, (because) it’s the only path possible for the group.”

France’s leftist government responded to the PSA Peugeot Citroën lay off news by demanding that the private, independent company provide details of what cabinet memhers called a “real shock for all employees of the group.” Socialist Prime Minister Jean-Marc Ayrault also ordered a “a support plan” be prepared by July 25 to outline possible ways of assisting France’s automakers—a move that swiftly mobilized and livid unions warily welcomed.

The skepticism of union leaders is understandable, since it’s difficult to imagine how the government could possibly help out in any meaningful way. The money simply isn’t there.

An audit revealed earlier this month indicated the French government already must find up to $12 billion this year and $43 billion in 2013 just to meet the deficit reduction targets it has promised Brussels. The government has so far sought to recoup that initial shortfall with tax hikes primarily hitting the wealthy and businesses. But that won’t be enough to fill the hole—especially if the state starts throwing cash at heavy industries to limit proliferating lay off plans.

French Socialist François Hollande has pledged to spare ordinary consumers more pain than they already feel–and shift most of that to the wealthy. Yet experts say some boost of France’s value-added tax will be inevitable to recoup the nearly $55 billion that’s needed to meet deficit reduction targets through 2013. Meantime, Hollande’s government is already showing signs of preparing to increase a tax linked to salaries, despite repeated promises the very suggestion was unacceptable. The reason for the rethink: each percentage point that particular tax is boosted will bring an additional $15 billion in to drafty state coffers. Given that, it seems unlikely Hollande will be able to continue renouncing those resources as the crisis stiffens.

That’s especially true since the inability of any EU government to start giving companies money to forestall restructuring plans means the resulting unemployment will put even more strain on already maxed out state funds. In business or government alike, leaders across Europe now seem to clearly see they’re facing a wall offering no easy way around it.