Tuesday, August 24, 2010

France Planning to Shrink Deficit So it Can Grow

France getting tough on deficit spending

After proposing a constitutional amendment to limit debt, France is continuing its debt-fighting measures.

In a country that, in the eyes of many, helped pioneer tax-and-spend welfare politics, the challenge to adherents of conventional welcare politics is stark:

Your time is almost up.

French Budget Minister Francois Baroin -- who, as an interesting fiscal innovation, works at arms-length from their Finance Minister -- is touting the French government's commitment to reducing their deficit to 6% of its Gross Domestic Product by 2011, and 3% by 2013.

France's deficit is currently 8% of its GDP.

According to Baroin, deficit-fighting is key to France's aspirations to grow its economy, and with unemployment that averages 10%, the French economy desperately needs to grow.

"Everything must be directed towards this aim: we are obliged to return as quickly as possible to the pre-crisis levels of deficit," Baroin insisted. "It is an essential issue for our economic growth."

But as it turns out, economic growth will be a troubling factor for the French budget.

"They are being a bit optimistic," explained ABM Amro economist Joost Beaumont. "France has quite a track record of pencilling in too high growth in its budgets."

Moreover, according to Beaumont, France actually risks reneging on these commitments, and lagging behind other European countries -- such as Germany, where a similar constitutional amendment has been proposed.

"France has a very poor track record in sticking to its deficit commitments, and if you look at the details of how they plan to do it, it is still not clear," Beaumont continued. "They have a lot of work to do and so far they are the only [European] country just paying lip service to austerity."

If Francois Baroin and Finance Minister Christine Lagarde make good, however, it will set the table for France to make tremendous progress tackling its problem of traditionally-high unemployment.

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