Rigeur (austerity)

ROME -- ereguly@globeandmail.com

Britain and Germany are doing it. So are Spain and Italy.

The European Union's biggest countries are rolling out austerity programs that range from the tough to the brutal. Notably absent from the list of courageous cutters is France. President Nicolas Sarkozy refuses to mention the R word - rigeur - which is French for austerity.

As France's public finances deteriorate at an alarming rate, Mr. Sarkozy's reluctance to wield the axe is bound to change, economists say. "France's main task is to ensure financial markets that things are under control," said Jurgen Matthes, international economist at Germany's Cologne Institute for Economic Research. "I tend to think that, sooner or later, France will bow to this pressure."

So far, France has talked the talk but not walked the walk, insisting on austerity measures elsewhere but making relatively few cutbacks itself even though both its national debt and budget deficits are climbing rapidly.

In 2009, France's deficit was 7.5 per of gross domestic product (GDP). According to Deutsche Bank forecasts, the figure is expected to rise to 7.9 per cent this year even as those of many other EU countries are falling. France's goal is to cut the deficit to 6 per cent in 2011.

France's 2010 deficit will be almost as high as Greece's. Among the large EU countries, only the deficits of Spain and Britain are worse. France's overall public debt, meanwhile, has been rising and is just under 80 per cent of GDP. The country is also running a current account deficit of about 2 per cent of GDP, meaning it has to rely on foreign financing.

The French government has taken some steps to get its deficit under control. It recently announced that it will freeze all spending, except in certain crucial areas, such as pensions and interest payments on government debt, between 2011 and 2013. It also will cut state operating costs (though not state budgets) by 10 per cent over the same period. Mr. Sarkozy has said the measures do not amount to an austerity plan.

Compare this to other big EU countries. Germany, the healthiest European economy, is eliminating €80-billion ($100-billion) of public spending between 2011 and 2014. The effort will reduce public-sector employment by 15,000 and raise revenue by slapping a tax on air travel and nuclear power plant operators.

Italy, whose deficit, at 5.3 per cent, is well below the EU average, recently approved €24-billion in spending rollbacks, including pay cuts to senior civil servants. On June 22, Britain's new coalition government will unveil an "emergency" budget that is expected to reduce the government's role in the state by the greatest amount since Margaret Thatcher's early days as prime minister. Prime Minister David Cameron on Monday said the cuts will be so extensive that they will affect "our whole way of life."

Economists think France has been reluctant to introduce an aggressive austerity program because it doesn't have the political courage to do so and because it fears that deep spending cuts might plunge the country back into recession. "They don't want to dampen demand and risk a deflationary spiral," Mr. Matthes said.

Politics may be the bigger factor. In late May, hundreds of thousands of French workers protested the Sarkozy government's plans to raise the retirement age past 60. Retiring relatively early is considered an iron-clad social right. The images of protests - some 400,000 people took to the streets - may have scared Mr. Sarkozy's ruling, centre-right UMP party.

"Given the electoral cycle - presidential elections are in May, 2012 - I am suspicious about the ability of the government to cut meaningfully the deficit next year," said UBS economist Stéphane Deo.

Some French ministers, if not Mr. Sarkozy himself, are convinced that France must take swift deficit-reduction action. On May 30, Budget Minister François Baroin said it would be "a stretch" to keep France's triple-A credit rating (the highest rating) intact. The blurt had an immediate effect on the market, sending the yield spread over benchmark German bonds, considered the EU's least risky sovereign debt security, soaring. At one point, the spread doubled to almost half a percentage point.

Other French ministers quickly went into damage control, arguing that France's rating was not under threat. They noted that the government was having no trouble selling long-term debt.

Economists doubt France can rely on GDP growth to whittle down its debt and deficit. This year, French growth is expected to be only about 1 per cent, in line with the euro zone average but well less than Germany's 2-per-cent rate. Mr. Deo said "trend" GDP growth alone is not enough to stabilize France's debt-to-GDP ratio; deficit reduction would have to tossed into the mix.

The Organization for Economic Co-operation and Development has expressed doubts about France's ability to bring down its deficit quickly. Even if growth rises to a relatively strong 2 per cent, it sees France's deficit falling only to 6.9 per cent next year, almost a full point above the government's goal. "A stronger fiscal framework is needed to rebuild credibility and ensure that fiscal policy is countercyclical, especially in good times," the OECD said last month.

Mr. Deo said "large fiscal tightening is only a matter of time, it is unavoidable."