Facing Debt Spiral, French Plan Austerity Program Minus the Label

“What’s in a name?” Juliet ponders in Shakespeare’s great tragedy,France’s new socialist President is hoping Juliet was wrong and thenames applied to policies will matter. Specifically, his governmentseems to think it can create a French austerity program of lowerspending and higher taxes–without using the dreaded A-word.

The pressure is on. Didier Migaud, the head of France’s financial auditing agency, announced Mondaythat France’s budget was “in the danger zone in terms of its economyand public finances and we cannot rule out the possibility of a debtspiral.” The problem is that France has a miserable growth rate of 0.4percent this year. That means there is no hope of growing out of itsbudget problems. The only options are cutting spending and raisingtaxes. In other words, an austerity program.

But austerity has become a bad word in Europe where Greek and Spanishriots have made the issue a very risky proposition for heads of state.François Hollande is especially vulnerable since he ran for President asa socialist promising a laundry list of changes which reads like ablueprint to increase public debt and weaken private enterprise:

…create new jobs, hire more teachers and police officers; raise theminimum wage; impose a 75 percent income tax rate on the richest; andraise corporate taxes, including a 3 percent tax on dividends. He alsocalled for the restoration of tax on overtime and introducing afinancial 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 onhis laundry list of new spending. Migaud, the aforementioned financialauditor, is recommending spending cuts in advance of tax increases. Thedanger he sees is that new taxes could slow growth even further, makingthe 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.