Facing Debt Spiral, French Plan Austerity Program Minus the Label
"What's in a name?" Juliet ponders in Shakespeare's great tragedy,
"That which we call a rose by any other name would smell as sweet." But
France's new socialist President is hoping Juliet was wrong and the
names applied to policies will matter. Specifically, his government
seems to think it can create a French austerity program of lower
spending and higher taxes--without using the dreaded A-word.
The pressure is on. Didier Migaud, the head of France's financial auditing agency, announced Monday
that France's budget was "in the danger zone in terms of its economy
and public finances and we cannot rule out the possibility of a debt
spiral." The problem is that France has a miserable growth rate of 0.4
percent this year. That means there is no hope of growing out of its
budget problems. The only options are cutting spending and raising
taxes. In other words, an austerity program.
But austerity has become a bad word in Europe where Greek and Spanish
riots have made the issue a very risky proposition for heads of state.
François Hollande is especially vulnerable since he ran for President as
a socialist promising a laundry list of changes which reads like a
blueprint to increase public debt and weaken private enterprise:
...create new jobs, hire more teachers and police officers; raise the
minimum wage; impose a 75 percent income tax rate on the richest; and
raise corporate taxes, including a 3 percent tax on dividends. He also
called for the restoration of tax on overtime and introducing a
financial transaction tax.
The solutions to the potential crisis have to be put forward soon.
France needs 6-10 billion euros to meet budget targets this year and "33 billion euros, or $41.5 billion, next year."
That's assuming, of course, that Hollande doesn't try to make good on
his laundry list of new spending. Migaud, the aforementioned financial
auditor, is recommending spending cuts in advance of tax increases. The
danger he sees is that new taxes could slow growth even further, making
the problem even worse.
The NY Times quotes a London-based consultant who sums up the French situation this way: "...the trick is for the government to impose austerity without claiming it’s austerity." Given the scale of France's debt (90 percent of GDP) and Hollande's promises, that's going to be quite a trick.