France and the 3% Question

Written by Hilary Barnes

France’s finance minister Pierre Moscovici was fast off the mark on 17 September 2013 to reassure the French, following a report in Paris newspaper Le Figaro, that the 2014 budget Bill, due on September 25, will show the general government debt to GDP ratio going from 93.4% this year to 95.1%, a new record.

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One potentially dangerous consequence, said the newspaper, was an increase in the interest rate on French government debt issue as the financial markets become less and less indulgent at France’s inability sufficiently to curb the growing debt.

Moscovici did not deny the report, but said that the debt would peak next year and after that it would begin to fall. He said:

“There where Le Figaro is mistaken is that France is making structural reforms which will permit a reduction in the structural budget deficit (deficit corrected for business cycle effects).”

Moscovoco added that the structural deficit will fall by 1.7% next year.

We have heard something like that before. The budget deficit was supposed to go to 3.7% of GDP in 2012, but landed up at 4.8%. This year, by agreement with the European Commission, it is supposed to go to 3.7%, but is now expected to land at about 4.1%.

As Le Figaro suggested, the slippage in achieving the reductions in the budget deficit, and hence further rise the debt ratio, are likely to be the subject of difficult negotiations between the government and the Commission this autumn.

Earlier this year France was given a two-year extension of the period in which it is supposed to bring the deficit down to the maximum 3% permitted by EU treaties, but there was a condition:  France should use this period to make important structural reforms of the economy to puts its public finances on a sustainable path.

One of the subjects that the Commission worries about is the pension system. The government has indeed agreed to a reform, but it is a minimal reform that does little to tackle the fundamental problem, which arises from the increase in the ratio the retired population to the population of working age in coming years.

Voices have already been raised in Brussels suggesting that France’s reform is not up to scratch. Moscovici will no doubt argue that it is the best the government can do, given the political constraints.

Or, as Commission president José Manuel Barroso said a few days ago, the big problem that is facing France is its competitiveness; if it cannot resolve that problem, there will not be be any growth.

The French government describes the 2014 budget as a “combat budget. Barrosso is evidently not impressed. France should show “greater audacity” on the reform front, he urged.

Meanwhile, France is caught in the austerity trap. In the three years 2011 to 2013, fiscal contraction is estimated to have held back the real growth in GDP by between 1.5% and 1.9% each year.

This pressure will be reduced to 0.9% in 2014, the government says, and thereafter it is hoped that the fiscal pressure will be neutral, allowing GDP grow at around its long-term potential rate of 2%. That should be enough to ensure that the budget deficit and debt ratio fall.