France faces tougher cuts despite Hollande promises

Mon Jul 2, 2012 10:12am EDT
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By Daniel Flynn and Jean-Baptiste Vey

PARIS (Reuters) - French President Francois Hollande, elected in May on a promise to avoid growth-sapping austerity measures, should make tough savings and public sector job cuts to meet a European deficit target, the national audit office said on Monday.

Economists have warned for months that faltering economic growth was gnawing a hole in state revenues, but Hollande kept the issue largely under wraps until he won the presidency and his Socialist party topped parliamentary elections in June.

He now risks angering the public, along with leftist allies and trade unions, to achieve what the audit office estimated would be more than 33 billion euros ($42 billion) in savings next year to reach an EU deficit goal of 3 percent of GDP.

Including an additional one-off charge of 5 billion euros to cover tax repayments to foreign investment funds mandated by a recent EU ruling, next year's adjustment would total an unprecedented 4 percent of state spending.

That comes on top of 6-10 billion euros in budget savings needed this year for France to achieve a deficit target of 4.4 percent of GDP, the auditor said.

With its debt already due to exceed 90 percent of GDP this year, a level at which economists say it starts to sap economic growth, France risks being sucked deeper into Europe's debt crisis.

"The country is in the danger zone in terms of its economy and public finances. We cannot rule out the possibility of a debt spiral," Didier Migaud, head of the Court of Auditors, told a news conference. "2013 is a crucial year. The budgetary equation is going to be very hard: much harder than expected due to the worsening of the economic picture."

He added: "Missing deficit targets would damage France's credibility and could cause an unsustainable debt increase, making it impossible to finance it at sustainable interest rates."   Continued...