For more than a year the French government has been trying both short-term fiscal discipline and long-term economic reforms. It is failing at both.
Finance minister Pierre Moscovici has drawn up a 2014 budget that is heavy on spending cuts, for once, and lighter on tax hikes. It confirms that France will only meet the EU-imposed nominal deficit target of 3 percent in 2015, if all goes according to plan.
The shortfall will amount to 3.6 percent of GDP next year, based on a reasonable 0.9 percent growth forecast. French President François Hollande is eager to show that a socialist government can cut spending while the economy is only barely recovering from a recession. So what?
As other fiscally challenged governments in the euro zone, France is the victim of the German-inspired Brussels consensus on the wonders of austerity. As others, it is finding it can’t repair its finances and reform its economy at the same time.
One can argue about the details of the government’s budget plans but there is no denying that the austerity is real. The only number that really matters is the structural deficit. France is on track to cut it from 3.9 percent of GDP last year to 2.6 percent in 2013 and 1.7 percent in 2014. A cut of about 1 percent of GDP, repeated two years in a row, can only be described as a brutal hit on demand.
Meanwhile real wages are stagnating, the unemployment rate stands at 11 percent, and inflation is so low, at 1 percent, that it should become a concern. No wonder that Hollande, always the cautious type, doesn’t want to rock the boat with reforms that would really matter but require more political capital than he currently has with his 23 percent approval rating.
Instead of waiting for Angela Merkel to loosen up, as he has done in the last six months, it is time for the French president to proclaim his independence. Austerity is killing France’s attempt at reform. Stabilise spending in real terms, forego tax hikes, ignore the nominal deficit. Forget about the targets, and focus on the long term.