France is edging ever closer into danger as its growth stalls and poor economic data emerges from its neighbors. Hollande got elected on the back of his promises that he would force a renegotiation with German chancellor with Angela Merkel over austerity measures, but now it seems that he will indeed have to embrace the thing he swore to fight in order to halt his country’s slip into an economic catastrophe. He may need to implement tax increases and cut spending in order to balance the country’s books.
“The measures that need to be taken will be austere, unpopular and difficult,” said Dominique Reynie, a professor at Sciences Po in Paris. “Politically, the only way to do that is to say to the population that we’re in a crisis and need to take drastic action.”
So far he has been unable to draw any concessions from the Germans and has seen Spain beg for a bailout of its banks, his plan is not working. His ideas for Eurobonds have been shot down repeatedly by Merkel and the Austrians, negotiations are going nowhere fast. Some of the action he has taken has yielded some results Hollande’s pledge to shrink the budget gap to 3 percent of gross domestic product in 2013 from 4.5 percent this year and 5.2 percent in 2011 has helped France sell debt at record low borrowing costs. The government’s debt is estimated this year to be about 89 percent of GDP.
Hollande told voters that the challenges facing the Eurozone could be faced without the need for harsh austerity even suggesting that a country could pay their way out of trouble. He promised to raise the minimum wage and to improve incomes, but where is he going to find the cash needed for such a plan without raising the amount of debt the French currently pay?
“The No. 1 domestic issue Mr. Hollande needs to deal with is the deficit” said Dominique Barbet,an economist at BNP Paribas SA in Paris. “Avoiding a budget overshoot this year and coming up with a budget that meets existing fiscal targets is crucial. We expect some tough budgetary tweaking.”
The president has already taken money saving steps. During his first cabinet meeting he slashed government salaries by a third, a move that is sure to make him enemies in his own government.
Rumours abound that subsidies for non-social-welfare items, such as farming and culture, will be cut by 40 percent, proving that austerity is indeed necessary to balance France’s books. Hollande’s promises of fighting austerity seem to be moot as cuts are vital if the country expects to get back into the black and avoid the fate of Spain and Italy.
Matters are quickly slipping through the presidents fingers. A weakening global economy has seen demand for French goods fall sharply and companies such as Peugeot and Air France have been forced to cut thousands of jobs.
Making matters worse, companies from Air France-KLM Group to carmaker PSA Peugeot Citroen and mobile phone operators plan job cuts to countenance a slowdown in demand and increased competition.
Next week’s meeting of European Union leaders could prove to be make or break for the single currency as a solid firm plan must be decided upon if the crisis is to ever end. All eyes will be watching Hollande to see if he can win over the Germans.
Finance Minister Pierre Moscovi told his counterparts yesterday in Luxembourg that the government would meet deficit targets and improve competitiveness. Opposition lawmakers say Hollande hasn’t prepared the French for what’s coming.
“These targets require a very heavy, difficult effort that we estimate at 30 billion euros in 2012 and 2013,” they wrote in an open letter to Hollande last week. “No one can work miracles.”
The Pound to Euro exchange rate is currently trading at 1.240
The Pound to US Dollar exchange rate is currently trading at 1.560
The Euro to Australian Dollar exchange rate is currently trading at 1.250
The Euro to US Dollar exchange rate is currently trading at 1.257
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