PARIS: France slashed its growth forecasts for both 2014 and 2015 on Thursday and said it would miss its public deficit target this year after data showed the economy delivered no growth at all for the second quarter in a row.
Setting the stage for tricky negotiations with EU partners on public finances, Finance Minister Michel Sapin wrote in French daily Le Monde that the EU must adapt its deficit rules in light of the bloc’s weaker-than-expected economy.
Sapin did not specifically comment on the key 2015 target – when France’s public deficit is due to come into line with the EU’s ceiling of 3 per cent of GDP. But he hinted that goal would not be met, saying France would cut its deficit “at an appropriate pace.”
Noting that German data, also out on Thursday, showed a surprise economic contraction in the second quarter, Sapin stressed that France was not alone in the euro zone with a weaker-than-expected economy and called for a joint European response that would include major investment projects in infrastructure.
“We must adapt the pace of deficit reduction to the exceptional situation … of growth that is too weak everywhere in Europe and the exceptional situation of inflation that is too weak across Europe,” he told Europe 1 radio.
While economists have long said France’s growth and fiscal forecasts were too optimistic, the Socialist government had until now stood by its estimates as it struggles to mollify both voters angry with high unemployment and EU partners upset with repeated slippage on targets.
Francois Hollande, the most unpopular French president in modern history, had already failed to meet his target to cut down unemployment by the end of last year. He also faces dissent from a number of Socialist lawmakers unhappy with spending cuts.
Zeero growth
Sapin’s change of tack came as statistics office INSEE said on Thursday the euro zone’s second-largest economy posted no growth in the three months to June, the second quarter in a row that the economy was flat. Analysts had expected a feeble 0.1 per cent increase.
Investment by households – mostly real estate – was at its lowest since 1998, while foreign trade also weighed negatively on the economy. Consumer spending was the only bright spot which, together with government spending, saved the economy from contracting.
Inflation in France is stuck at its lowest level since November 2009, data showed on Wednesday, reinforcing government concerns that deflationary forces will harm its efforts to meet public deficit targets.
Sapin said that, as a consequence, France would grow by only about 0.5 per cent in 2014, half the previous forecast, meaning the public deficit would top 4 per cent of GDP, missing a 3.8 per cent target. The deficit stood at 4.2 per cent last year.
“The truth is that, as a direct consequence of sluggish growth and insufficient inflation, France will not meet its public deficit target this year despite a complete control of spending,” Sapin wrote in Le Monde.
“Better admit what is than hope for what will not be” were his opening words.
While the Socialist government had based its 2015 fiscal targets on a 1.7 per cent growth forecast, Sapin said it seemed unlikely, at this stage, that it would grow by much more than 1 per cent.
Europe needs a monetary policy “adapted to the exceptional situation of weak growth and weak inflation across the euro zone,” Sapin said, urging the European Central Bank to do more to combat deflationary risks and make the euro more competitive.
While maintaining its 3 per cent deficit ceiling, the EU has over the past couple of years switched its focus more to reforms and to the structural deficit – which strips out the ups and downs of the economic cycle.
EU leaders, under pressure from Italian Prime Minister Matteo Renzi, adopted in June a text which pledged to make “best use” of the flexibility built into the bloc’s fiscal rule book – as long as countries carry out reforms.
Analysts said the state of the French economy was such that the 3 percent target was unrealistic. They said focusing too much on that goal when private demand was depressed would be counter-productive.
“Growth is simply not there,” Barclays European economist Francois Cabau said. “These two quarters raise alarm bells to act to boost investment.”
The head of France’s ruling Socialist Party, Jean-Christophe Cambadelis, told Les Echos newspaper Wednesday it was “unavoidable” that France would abandon the target.
However, it could face sanctions if it does not meet the goal next year. Many in the European Union have voiced exasperation in recent years at its repeated failure to achieve fiscal targets, and have asked for deeper reforms.
France, which has already benefited from a two-year reprieve to fall in line in 2015, said on Thursday it would press ahead with a 50-billion euro spending cut plan for 2015-2017 but go no further.
While France has repeatedly called for EU-powerhouse Germany to do more to boost growth in Europe and for the European Central Bank to weaken the euro, ECB policymaker Jens Weidmann rebuffed its demands on Wednesday.(PTI)
