The European Slump: France Gives Up Lowering Its Budget Deficit

France's ruling leftists concede they won't meet 3% budget-deficit-reduction targets amid 2012 fourth-quarter growth numbers from across Europe indicating things getting worse, rather than better

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BERTRAND LANGLOIS / AFP / Getty Images

French President François Hollande attends a press conference at the E.U. headquarters in Brussels on Feb. 8, 2013

Poorer-than-expected economic news completely outed what was already the worst-kept secret in France. On Feb. 14, members of socialist President François Hollande’s government admitted they wouldn’t meet their 2013 target of keeping the budget deficit to 3% as previously (and incessantly) promised. That avowal was hardly a shocker: until now, the only people taking the 3% pledge seriously were the same French government officials who continued citing it despite increasingly dire economic statistics. But with figures for the fourth quarter of 2012 showing growth levels worse than feared, even Team Hollande conceded that meeting the 3% deficit objective had become the stuff of fantasy.

“We won’t be exactly at 3% for 2013, I believe, for the simple reason that growth in France, Europe and in the world is weaker than expected,” socialist Prime Minister Jean-Marc Ayrault said after official stats indicated the French economy shrank by 0.3% in Q4 2012, while growth across the euro zone was expected to decrease to around 0.6%. “[But] the objective — and it will be met — is 0% [budget] deficit by the end of [Hollande’s] five-year term, and what’s important is trajectory toward that.”

(MORE: It’s Official: Euro Zone Enters Second Recession in Three Years)

That “focus on the bigger target” message is one Hollande and his government have continually peddled to French voters and E.U. officials — especially as the economic outlook has darkened. Yet despite the abandonment of the 3% deficit-reduction target for this year, Ayrault’s assurances on progression to the larger, further balance-budget goal aren’t unfounded. The French deficit that ballooned to 7.1% in 2010 was first lowered to 5.8% in 2011 under conservative rule, and further cut to an expected 4.5% this year after the election of Hollande and fellow leftists last year. The goal of bringing it down this year to 3% — the official maximum allowed for euro members — was set within a range of economic policies and reforms that combined cuts, targeted stimulus spending and increased taxes. That approach, Hollande pledged, would stimulate France’s slumping economy enough to allow him to gradually remedy French public finances enough to table a balanced budget in 2017.

That has proved a far trickier act to pull off — especially amid confounding economic activity reflected in Thursday’s Q4 statistics. Indeed, some observers question Hollande’s ability to attain longer-term objectives for the same reasons that he’s suffered short-term setbacks: the persistently dismal growth levels that undermine the French plan don’t look set to rise anytime soon. The same is true for euro-zone partners the French do business with — as Thursday’s numbers again confirmed.

France’s 0.3% shrinkage in the past three months of 2012 was one of Europe’s better performances. Germany — by far the euro zone’s healthiest economy — declined 0.6% during the same period. That drop — blamed on flagging export activity the German economy relies heavily on — was Germany’s worst performance since early 2009. The wider picture is no better. Economists expect Q4 growth for the 17-nation euro zone to be down 0.6%, and there’s little hope the bloc will pull out of its prolonged recession anytime too soon.

France offers a fairly good example of why things look so bleak for Europe generally. France’s virtually flat growth rate in 2012 was one of the least dismal results in the euro zone — but even that pales what was an already anemic 1.7% French increase in 2011. With most economists expecting the French economy to recede by at least 0.1% in the first quarter of 2013 (which would officially signal France’s re-entry into recession), the government’s projection of 0.8% growth for the year is clearly too good to be true. Right on cue, French Economy and Finance Minister Pierre Moscovici responded to Q4 figures saying governmental growth estimates for 2013 would be “rethought.”

“The situation isn’t good, and the numbers are worrying,” Moscovici told France 2 TV, where he also echoed Ayrault’s concession that the government wouldn’t be able to meet its 3% deficit reduction amid such bad economic conditions. “The question that has to be asked is one of [deficit-reduction] rhythm.”

In other words, stay the course despite the bad news and remain focused on the bigger targets. That message is one Hollande himself has been repeating to the French public, with warnings that France’s economic and employment situation will continue declining through mid-2013. But at that time, Hollande assures, policy decisions and reforms he’s undertaken will begin turning the situation around as growth returns. That virtual spiral of resumed activity and job creation, he vows, will continue getting better as France and its partners overcome the financial crises they’re battling, and see economic activity rebound in a way that benefits them all.

That’s a message of patience, however, that voters in France — and doubtless elsewhere in the suffering euro zone — are growing weary of. December saw the 19th consecutive month of increased jobless numbers in France, lifting the unemployment rate to 10.7%. Destruction of the nearly 67,000 posts in France in 2012 is set to accelerate as the economy continues to flatline or sink as 2013 wears on. Few observers foresee any significant improvement soon.

Beyond the French government’s soon-to-be-revised 0.8% growth projection, the most optimistic forecasts for France include the European Commission’s predicted 0.4% expansion and the International Monetary Fund’s 0.3% estimate. Neither of those would allow Hollande to meet his sacrosanct 3% deficit target without further spending cuts — an option the President clearly viewed as begging for additional trouble from France’s already exasperated public.

It remains to be seen whether expensive concessions like that will convince the French to overlook Hollande’s short-term setbacks and to look forward to his fulfillment of bigger goals. It’s a risky bid. By sacrificing the 3% objective with which he justified earlier spending cuts, Hollande has many French voters already wondering where the gain is that their pain was meant to produce. It also has them asking whether long-term goals will prove just as elusive as the short-term ones have been.

MORE: The E.U. Budget: Champions of Austerity Win a Big Battle — for the Most Part

4 comments
larrydanny
larrydanny

France has very high income tax and VAT tax rates: Corporate  taxes are 33.33%, max income tax rate is 75%, and the VAT is 19.6%.

With taxes like that, no wonder the economy is in the dumps.

I guess the French like to pay for all of their governmental socialist programs, so what else can one expect? Most of Europe is in the dumps as well. Maybe it's time for them to reduce or eliminate  taxes, so that the private sector can create some jobs.

seizeabe
seizeabe

Economists recommend a little bit of deficit. So, what's the panic?

3% is nothing!

So long as greed exceeds compassion, deficits will continue to exist.

The rich evade taxes under various pretexts.

And, businesses conceal profits under different heads.

The only section of society that cannot hide income is wages & salaries.

Businesses & rich want more airports, more highways, more seaports.

All to transport, park and berth their goods, luxury aircraft & yachts.

When it comes to building these, the businesses & rich forget that.

Some French are willing to even migrate to Russia.

When all such patriots move, ordinary folk will have a chance at life.

Never mind the deficit! Till then...

gollygee13
gollygee13

@bayonnebernie @TIMEWorld We'll have none of that Anti-Free Trade talk, Bernie! Why, everything is Peachy-Keen; just ask Lloyd Blankfein!

LaddieSchnaiber
LaddieSchnaiber

@TIME @TIMEWorld France will never get rid off its deficits.