Adjustment Time for core Europe

France and Germany, the two core economies in Europe, need a correction like the rest of the eurozone countries. The French prime Minister Françoise Fillon on Sunday announced the second adjustment plan in four months, “ the most rigorous since year 1945”, whose aim is to obtain between six to eight additional billion euros. On the other hand, Angela Merkel confirmed that the German will benefit from a tax cut of six billion euros in the coming years in order to achieve wider fiscal fairness in the country.

The key measure for the French adjustment plan will be the pension reform, which will establish a later retirement age. The reform was thought to be put into practice progressively until 2018, but Fillon will confirm on Monday that it will be anticipated one year or even two. Some other measures have not been yet specified but French media consider a possible Value Added Tax (VAT) increase from current 5,5% to 7% in the hospitality sector as well as in some delivery services, and also a new tax on the companies whose turnover exceeds 500 million euros. France has recently reduced its expected economic growth goal for 2012 from 1,75% to 1%. The rating agencies have warned French authorities about the need of budget control in order to hold the country’s debt AAA rating.

Regarding the tax cut in Germany, it will be implemented in two terms. German taxpayers will have to wait until 2013 (elections year) to enjoy the two billion euro first tranche, while an additional four billion will be received in 2014.

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