The new French Socialist government launched tax rises and spending cuts on Wednesday to meet budget targets as growth flags, with the eurozone debt crisis burning on and Italy falling behind.
The French cabinet approved action to adjust the budget with 7.2 billion euros in tax hikes and 1.5 billion euros in spending frozen this year, two days after an audit warned it has to find up to 43 billion euros just to stay on track this year and next.
The cabinet acted after the government won a vote of confidence for its broad programme outlined to the national assembly on Tuesday.
In Italy, official data revealed that the public deficit in the first quarter of the year overshot to total 8.0 percent of output from 7.0 percent in the first quarter of last year.
The statistics office, referring to a critical surge in the interest rate Italy must pay to borrow late last year, said the increase reflected “increased spending on interest” and reduced tax revenue because of recession in the economy.
Italy, which is burdened by particularly high public debt rather than annual deficit, intends to cut its public deficit from 3.9 percent of output last year to 1.3 percent this year and 0.5 percent next year.
Italian Prime Minister Mario Monti and German Chancellor Angela Merkel were to meet late on Wednesday to discuss the eurozone crisis after a landmark summit at the end of last week.
The latest Italian data comes after Monti pushed crucial although diluted labour reforms through parliament just before last week’s summit, and then pushed Germany into accepted extra help for countries in trouble at an EU summit on Friday.
The outcome of the summit, hailed by EU leaders as a breakthrough, and despite scepticism on financial markets about incomplete details, trading has steadied.
On European stock markets, London, in the throes of drama over rate rigging and top-level resignations at Barclays bank, shares were showing a fall of 0.24 percent to 5,673.92. Shares in Frankfurt dropped by 0.45 percent, and in Paris by 0.53 percent.
The euro slid to $1.2581 from $1.2607 late on Tuesday.
In Asia stocks were generally firm on prospects that central banks might be about to act to boost economic activity.
The European Central Bank meets on Thursday and is aidely expected to reduce its key interest rate from 1.0 percent.
The French measures, already attacked as a cynical about-turn by the conservative opposition which thrown out of government in the last few weeks by a promise to go for growth by the new President Francois Hollande, risks also upsetting the left wing of the government’s own supporters.
On Tuesday, French Prime Minister Jean-Marc Ayrault, whose government is committed to backtracking on part of a pension reform by the previous government, to increase the minimum wage and the number of teachers, called for national “mobilisation” to fight a “crushing” and “unprecedented” debt burden, blaming the last government for adding hugely to the national debt.
The cost of interest on the debt is now the biggest item in the central government’s budget, and Ayrault put the figure at nearly 50 billion euros ($63 billion) per year.
France has run deficit budgets since the 1970s.
Ayrault said that the French economy would grow by 0.3 percent this year instead of 0.5 percent, and only 1.2 percent next year instead of 1.7 percent as expected when the last government drafted the budget.
As part of the new focus in the eurozone on controlling public finances, under relentless pressure from those on financial markets who lend to governments and also from German Chancellor Angela Merkel, France has told the European Union it will reduce the budget deficit from 5.2 percent of output last year to 4.5 percent this year and to the EU ceiling of 3.0 percent next year and balance the budget in 2017.
In Brussels on Wednesday, the latest Markit PMI surveys, key leading indicators of economic trends, pointed down, and the data for France, while steadying, was in line with contraction of the economy in the second quarter.
Another eurozone government, a new conservative-led coalition in Greece, is to soon present its programme, under pressure from auditors from the International Monetary Fund, European Union and European Central Bank.
They have begun arriving on a mission to see if the country is making enough progress on its budget and structural reforms to warrant the release of the next slice of bailout funds under a second rescue which involved also a huge debt write-off.
The head of the European Commission task force in Greece, Horst Reichenbach said that the audit, a regular progress report, “is of utmost importance.”
Greece needs new funds to pay its running costs in the next month, and deputy Finance Minister Christos Staikouras said: “The economic situation is critical.”
Prime Minister Antonis Samaras won the recent election with a strong commitment to meet rescue conditions, but Greece is expected to try to renegotiate some of the terms.
One issue which has bedevilled relations between Greece and the auditors is long delays in carrying out promised privatisations.