Research Dept. News
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Monthly Report, num 336 - June 2010
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European Union - France
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France increases its efforts to control its public accounts
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The French government undertakes to cut its deficit to 3% before 2013.
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The recession and fiscal stimulus measures adopted to revive the economy have aggravated budget imbalances. In 2009, France's public deficit was 7.5% of GDP and total debt grew to 77.6% of GDP. Moreover, in 2010 the public deficit is expected to reach a record figure of over 8% of GDP. As in other, highly indebted countries, the French government acknowledges the need to control finances more thoroughly and thereby calm the markets. It therefore proposes to reduce its deficit to 6% in 2011, 4.6% in 2012 and 3% in 2013.
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With this very aim in mind, on 20 May the French president, Nicolas Sarkozy, announced his intention to introduce, in the constitution, a new reform aimed at controlling the deficit: as from the next general elections in 2012, the government will set a five-year target for the structural public deficit and the Constitutional Council will ensure that it is met. This initiative will be subject to consultation by the political parties in June and the executive will then put forward a constitutional bill.
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The government plans to reform pensions.
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Another area implemented by the French government to improve its public accounts is pension reform. On 16 May the minister for Employment, Eric Woerth, presented a memorandum to the trade unions proposing to increase the length of time for employment. This would be done by either raising the legal retirement age, currently at 60, or by increasing the period to pay social security contributions.
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French GDP grows by 0.1% in the first quarter of 2010.
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With regard to the pace of recovery of the French economy, data from its National Accounts system show a 0.1% rise in GDP in the first quarter, so that there have now been four consecutive quarters with positive figures for quarter-on-quarter growth in France. Although this 0.1% rise is lower than the figure recorded in the preceding quarters, possibly due to adverse weather conditions, most indicators suggest that this will improve in the second quarter.
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From the point of view of supply, of note is the strong recovery in industrial production in the month of March, advancing 6.2% year-on-year. For their part, the surveys can be interpreted positively in general, although they are divergent. According to the Bank of France's Annual Report published on 10 May, the business climate index for the services sector rose by two points, standing at 95 points, while the equivalent index for industrial business fell by two points. Based on the trend in activity indicators, the same report predicts moderate progress in activity over the coming months and estimates a 0.5% growth in French GDP in the second quarter of 2010.
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From the perspective of demand, a breakdown by component of French GDP shows that exports are performing well, growing by 3.9% in the first quarter of 2010, greater than imports, which rose by 2.0%. The fact that many European countries are experiencing economic difficulties might slow up this favourable trend in foreign sales, as Europe accounts for two thirds of all French exports. However, the depreciation of the euro might offset this, facilitating trade with non-EU countries and thereby taking advantage of the dynamism of the emerging economies. This was precisely one of the aims of the French president's visit to China last April.
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Exports take over from consumption as the engine for growth.
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With regard to private consumption, normally the engine for French growth, the data point to total stagnation in the first quarter of 2010. The outlook for the second is somewhat better, in spite of the fact that household consumption fell a little in April. For its part, public expenditure only increased by one tenth of a percentage point and, unlike private consumption, it's not expected to rise over the coming months, in fact quite the opposite.
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Investment, the other component of domestic demand, fell in the first quarter of the year, albeit more moderately. However, surveys on business investment decisions show a more favourable profile for 2010. In effect, the entrepreneurs interviewed in April predict a 6% rise in investment, particularly in electronic equipment and machinery.
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In summary, although the recovery in economic activity in France slowed up a little in the first quarter of 2010, indicators point towards stronger growth for the second quarter. However, there are risks of decline due to the problems of excessive debt in a large number of European countries.
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