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Sobering up

7 November 2011 By Pierre Briançon

The euro crisis is saving Sarkozy from himself. And it should help prevent the upcoming French presidential campaign from turning into the usual competition of unrestrained spending promises.

The French government has looked into the political abyss – otherwise known as a downgrade of the country’s credit rating. And it has decided that in these sober times, voters want it to stick to its fiscal targets.

The economic slowdown had made the goal of shrinking the 2012 budget deficit down to 4.5 percent of GDP unrealistic. But instead of sticking to rosy growth forecasts or changing the target – as it would have done in the past – the government is cutting spending and increasing taxes. The aim is not to tackle the French economy’s deep-seated problems. There isn’t enough time for that for now. But as a short-term fix, it will help.

This is the second time in three months that the government has tightened its budget in response to market concerns. More than 70 percent of the 18.6 billion euros of extra measures in 2012 and 2013 are tax hikes, which will hurt growth. In a country where taxes already amount to some 50 percent of GDP, this is a lot.

But spending cuts may look modest by comparison but their impact will increase over time. By 2016, this week’s plan will generate more spending cuts than extra revenue. And the government has shown it meant business by advancing by one year its planned overhaul of the pension system, the only serious reform of the Sarkozy presidency.

Politically, the sitting president isn’t taking too much of a risk because the brunt of reforms will be implemented after the elections next May. Sarkozy’s socialist rival Francois Hollande has already criticised the plan, which could undermine its overall credibility. But if the socialist pretender is elected and cancels all or part of the programme, the new government will have to come up with another one that keeps the deficit reduction on track. With markets, ratings agencies and other euro zone countries (that is, Germany) watching, French governments of all hues have only have limited capacity to do harm.


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