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French budget tries to turn page but growth weak

September 25, 2013
Associated Press

PARIS (AP) — The French government has declared the economic crisis over and is promising that its budget for next year will bring growth and jobs, but experts are criticizing the proposal from all sides and a true rebound looks a ways off.

In a budget to be unveiled Wednesday, the government says it will cut the deficit by 18 billion euros ($24 billion), 15 billion euros of which will come from spending cuts and the rest from taxes.

The government has promised the measures will re-energize the economy by reducing the role of the state and fostering competition. But economists are split on the merits of cutting spending now.

While the move would in principle be welcome in a country where public spending makes up 57 percent of gross domestic product, it will hurt growth in the short term, just as the country is emerging from recession and with unemployment at 11 percent. The modest tax increases, meanwhile, are eliciting grumbles in France, which already has one of the highest tax burdens in the world.

The budget appears to be Paris' belated effort to fall in line with the rest of Europe's focus on reducing public debts.

The slow approach is typical of Francois Hollande's tenure. The French president is famous for trying not to be famous. His most notable domestic policy so far, the creation of a 75 percent income tax, was rejected by a court and amended so many times that it lost much of its shock value. His reforms have been painstakingly negotiated and have often lost much of their punch by the time they are announced.

Such delays have drawn a critical eye from the European Commission, the executive arm of the European Union, and Germany, which led the push for austerity in Europe. While the Commission has softened its stance somewhat — notably giving France more time to reduce its deficit — the re-election of German Chancellor Angela Merkel this weekend was an endorsement of her tough line.

But some economists say France and Europe are still focusing too much on reducing deficits and not enough on re-launching growth.

Eric Heyer, an economist with the French Observatory for Economic Forecasts, says the budget for next year is moving in the right direction, but that spending cuts are still not advisable since the economy is still in trouble. He estimates that spending cuts and tax increases — both in France and around Europe — will shave 1.3 percent off France's growth next year. Still, the observatory's forecast is among the most positive at a 1.3 percent increase in GDP. The consensus is somewhere just below 1 percent; the French government built its budget around a 0.9 percent estimate.

Heyer cautions that a return to growth doesn't mean France is rebounding.

"We can't talk about a recovery as long as economic growth is around 1 percent," he said. "Since today, we produce less than five years ago, we are still in recession. That's the real definition of a recession."

"The real rebound will be when we have a production level well above 2007 and when the economy has started to create jobs again. That's not in the government's scenario."

Still, Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics in Washington, says France has likely escaped the crisis without the explosions of unemployment and deep recessions seen in Southern Europe. But that also means it no longer has the motivation to make the real, deep reforms it also avoided.

"There's never going to be a hard landing. ... It's going to be a gradual underperformance," not only compared with Germany but also with traditionally weaker countries like Spain and Italy, he said.



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