France update August 31st , 2012

by Véronique Queffélec on septembre 2, 2012

france-update-august-31st-2012


Key summary

French President Hollande putting the ECB under the spotlight

French President Hollande says he remains supportive of possible intervention by the ECB, and was “simply” asking the ECB to carry out decisions taken by EU leaders at the June 29 Summit, while stressing that it remains up to the ECB to decide how to intervene.

France and Germany, an even closer cooperation.

France and Germany announced after the meeting of their respective finance ministers that they would aim to coordinate Euro zone proposals through the launch of a bilateral working group ahead of the October 18-19 EU council.

France 2013 budget

FM Moscovici announced that France’s budget deficit would be below 3% of GDP in 2013, but did not make any references to the GDP growth forecast other than it would be “solid and realistic”. PM Ayrault declined to repeat the 1.2% 2013 GDP growth forecast when speaking on French TV on Monday evening, but remarked that it “may be necessary to reduce that a bit.”

PM preaches fiscal orthodoxy, indicating that the government would implement spending restraint to bring the budget deficit down to 3% of GDP in 2013. Parliament to convene for a special session on September 10, two weeks earlier than planned, to examine the 150,000 “jobs for the future” programme. Economic sentiment remains unchanged in August at lowest level since September 2009.

FM stresses need for credible EU policy to boost confidence.

With respect to long-term structural reforms of the French economy, he noted that the “financing of the welfare cannot rely on labour taxes only”, indicating that there would be progress “in the coming year”.

Key Analysis

French President Hollande putting the ECB under the spotlight

the French President urged fellow heads of State and Government to take “long lasting” decisions at the October 18/19 EU summit. Hollande stressed that structural fixes were needed rather than “short term answers to problems in this or that country” to erase doubts about the euro area. He added that he remained supportive of possible intervention by the ECB in the name of ensuring the smooth transition of monetary policy given wide Government bond spreads, and was “simply” asking the ECB to carry out decisions taken by EU leaders at the June 29 Summit, while stressing that it remains up to the ECB to decide how to intervene.

With tensions in financial markets remaining high and the prevailing uncertainty having a negative impact on economic activity, some euro area Governments are increasing the heat on the ECB to participate in the financial stabilization effort. Yet this requires some member States to request financial assistance in the first place, whereas the interested parties would rather have an automatic support mechanism once yields breach a certain threshold. More consultations between the various interest parties will continue in the coming weeks.

Even closer cooperation between France and Germany

France and Germany announced after the meeting of their respective finance ministers Pierre Moscovici and Wolfgang Schäuble that they would aim to coordinate euro zone proposals through the launch of a bilateral working group ahead of the October 18-19 EU council. Earlier this week, Schäuble said that he and Moscovici talk on the phone once a week and meet in person at least every other week. He added that the working group now being established “is proof just how close our cooperation is”. Les Echos wrote that the group, to be jointly headed by the head of the French Treasury Ramon Fernandez and Germany deputy finance minister Thomas Steffen, would focus on the following topics: Greece, Spain, banking supervision and European integration. Closer cooperation between France and Germany would probably be welcomed by most financial market participants.

Finance Minister Moscovici stresses need for credible policy to boost confidence.

He argued that “member States have to take responsibility” with respect to fiscal policy and support mechanism, and that the implementation of the right policies was necessary to increase credibility. With respect to some long-term structural reforms of the French economy, he noted that the “financing of the welfare cannot rely on labour taxes only”, indicating that there would be progress “in the coming year”. The Government is mulling some changes in the financing of social security spending by widening the tax base in order to reduce the burden on payroll taxes and make some strides towards boosting firms’ competitiveness. The deadline set by President Hollande for a decision on this issue is the first quarter of 2013.

Budget deficit - French PM preaches fiscal orthodoxy

French Prime Minister Jean-Marc Ayrault stressed on Wednesday that his Government’s priority is to restore stability to Europe, pledging to stick to its EU budget deficit targets. On thursday morning, INSEE revealed that economic sentiment in France has remained unchanged at 87 in August, its lowest level since September 2009.

Speaking at the MEDEF employers’ group conference, Mr Ayrault indicated that the Government would implement spending restraint in order to bring the budget deficit down to 3% of GDP in 2013, a strategy that would reinforce “France’s financial credibility” and would be beneficial to companies. He argued that spending discipline would be a key part of the budget and that meeting announced targets was critical for sovereignty.

On the topic of European integration and cooperation with Germany, Ayrault remarked that pressing ahead with the former was “indispensable”, and that “the Franco-German couple is more necessary than ever.” He also called on a rapid implementation of the banking union and joint banking supervision. The Government also indicated on Wednesday that parliament will convene for a special session on the 10th of September, two weeks earlier than planned, to examine the 150,000 “jobs for the future” programme that will offer mainly public sector contracts to poorly qualified youngsters at a cost of €2 billion this year and next.

GDP forecast for 2013 likely to be reduced

French Finance Minister Pierre Moscovici announced that France’s budget deficit would be below 3% of GDP in 2013, but did not make any references to the GDP growth forecast other than it would be “solid and realistic”. Le Monde wrote that the government could perhaps reduce slightly its 1.2% GDP forecast for 2013 versus the IMF’s 0.8% and 0.5% for the consensus. PM Jean-Marc Ayrault declined to repeat the 1.2% 2013 GDP growth forecast when speaking on French TV on Monday evening, but remarked that it “may be necessary to reduce that a bit”.

Given the weakness of GDP growth in the past few quarters, some downward revision to the 2013 GDP forecast seems very likely. With unemployment reported to have increased by 41,300 or 1.4% in July to just short of 3 million, its highest level in 13 years, the labour market picture does not seem consistent with such a level of growth.

Conclusion

President Hollande appears to be struggling to convince voters about his ability to solve the crisis, with an IPSOS poll which reports that the President’s popularity declined by 11 points in August to 45%. With the 2013 budget less than a month away, the Government is trying hard to convince the public and investors that meeting the 3% budget deficit target is both necessary and desirable. Despite the Government’s best efforts, it is likely that this objective will be missed unless confidence recovers significantly into year-end.