Is France's austerity plan convincing enough?

In Madrid's financial City, some believe France's fiscal adjustment plan may be insufficient. This is a note from Asesores Financieros Internacionales:

“Given the evolution of the French debt in recent months, and aiming to prevent the potential contagion from the increasingly worrying situation in Italy, and a rating cut by ratings agencies, the Government of France has announced a second fiscal adjustment plan which aims to reduce the deficit by €7 billion in 2012 (the first plan of adjustment posed a reduction of €11 billion) and save €100 billion over the next five years.”

The new adjustment plan is a sign of the commitment to the deficit reduction targets (4.5% of GDP in 2012, 3% in 2013 and a balanced budget in 2016), as a response to an economic slowdown that had threatened past measures' credibility (the Government forecasts a GDP growth of 1% in 2012 versus the 1.7% expected when it announced the first fiscal adjustment plan). Afi says:

“If we consider that government forecasts remain optimistic (our estimates point to 0.3% GDP growth in 2012, and attention must be paid the to the estimates update of the European Commission on Thursday) and that the measures may impact negatively on domestic demand, meeting the deficit target seems complicated.

“Effects: neutral reaction on the markets to the measures announced (the 10-year rate rose 3 bp going up to 3.10% and the differential against Germany renewed highs in the region of the 128 bp), with uncertainty about the situation of Italy as a backdrop.

The main points of the austerity package are an increase of the reduced VAT rate by 1.5 percentage points up to 7%; an increase by 5pp in corporate tax for the next two years for companies with a turnover exceeding €250 million; a decrease in subsidies and social spending; and a delay in the retirement age from 60 to 62, which will take place in 2017 instead of the following year as planned. The salaries of the Prime Minister and Ministers will be frozen, and subsidies to political parties will be cut down.


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