France misses 2012 deficit target

France missed its budget deficit target in 2012, as it will again this year, underlining the severe challenge facing President François Hollande’s socialist government in meeting key commitments to its European partners on managing its public finances.

Official figures showed the nominal deficit last year was 4.8 per cent of gross domestic product, overshooting the government’s target of 4.5 per cent. The 2011 deficit was also revised slightly upwards to 5.3 per cent.

The government has already acknowledged it will overshoot this year’s target deficit of 3 per cent previously agreed with the European Commission. With the figure now forecast to hit 3.7 per cent, France is seeking a year’s delay from the commission for reaching the target, the level at which growth in the public debt should stabilise.

Much of the concern about France’s public finances stems from its high level of debt. The figures from Insee, the national statistics agency, showed the public debt, including France’s commitments to the eurozone’s rescue funds, rose to a record 90.2 per cent of GDP in 2012, slightly higher than target and up from 85.8 per cent in 2011.

France has not had a balanced budget since 1974 and is under strong pressure to cut its big public spending bill, which amounts to more than 56 per cent of GDP, the second largest in the EU.

In a television interview on Thursday evening, Mr Hollande repeated the government’s rejection that it should make additional savings this year on top of the €20bn in tax increases and €10bn in spending cuts already provisioned.

But he said France was committed to budget discipline, promising not to raise taxes further after this year but to concentrate on public spending cuts. His government is targeting €60bn in cuts over the next five years and Mr Hollande said pensions reforms and an adjustment of France’s lavish welfare benefits would be among measures taken.

The Financial Times March 2013

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The euro crisis Rebalancing, and the big squeeze

THE euro zone would like to make its way out of recession at some point; the longer it stays there the more painful and less successful is fiscal consolidation. But growth engines are in short supply. Private deleveraging has a long way to go, and so private domestic demand remains weak across much of the euro zone. Government is a big drag on growth in most of the region's economies. That leaves external demand—net trade—to do the heavy lifting, but since member states mostly trade with themselves the going is very, very slow.

The euro area's external trade balance is improving. In the first eight months of 2012, the euro area ran a surplus of €46.9 billion, compared to a deficit of €26.8 billion during the same period in 2011. Exports rose 9% from the prior year while imports were up just 2%. Yet the net swing, of less than 1% of GDP, is far too small to overcome the euro area's domestic headwinds. Ideally, there would also be substantial rebalancing within the euro area, with countries facing the harshest austerity exporting much more to a healthier set of core economies.

That's happening, but not at all to the necessary extent. German imports rose 2% from the first half of 2011 to the first half of 2012, but its trade surplus actually rose over that period. Exports are rising—and imports collapsing—around the periphery. Yet Greece, Spain, and Portugal continue to run substantial trade deficits.

If the German economy were running extraordinarily hot, then the periphery would have already made up most of the competitiveness gap and could rely much more heavily on exports for growth. But the German economy is not running hot. It is not running hot at all. According to Markit's latest flash PMI, German output continued to contract in October. Weak manufacturing continued to be a problem, but service activity contracted as well.

The euro area would love to slough its problems off on others, but the rest of the global economy is too shaky to provide the strong source of external demand Europe needs. America is trying to rebalance its economy and raise net exports, and China is trying to rebalance its economy away from imports of the massive capital goods Germany specialises in selling. The euro area needs more domestic demand, and that means more German demand. 

The easiest way to pinpoint growth in German demand would be German stimulus: temporary German tax cuts, for example. But looking at the euro area as a whole, one notices that euro-area nominal GDP growth was below 1% in the year to the second quarter of 2012 (German NGDP growth fell by half from 2011 to 2012). Monetary policy is a problem. The ECB has put its neck on the line trying to hold euro area financial markets together and peripheral yields down, and it can point to a headline inflation rate that's currently above target. But in the absence of more nominal growth, the adjustment process will continue to be long, painful, and dangerous.

The Economist October 2012

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