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France tightens its belt with €10bn austerity plan

Maryam Nemazee

Published 25/08/2011 | 05:00

Nicolas Sarkozy. Photo: Getty Images
Nicolas Sarkozy. Photo: Getty Images

France and Germany yesterday felt the cold winds of the ongoing economic turmoil as the French Prime Minister Francois Fillon announced an austerity package aiming to raise at least €10bn in extra revenues. Meanwhile, German business confidence slumped to its lowest level in more than a year.

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France is hoping the savage cuts will ensure that any growth slowdown does not undermine its triple-A credit rating.

The measures, pulled together after French stocks were hit by fears over the rating's stability, are expected to scrap tax exemptions and incentives worth an estimated €3bn to 4bn this year and a further €10bn in 2012.

Mr Fillon has called a news conference to unveil the package put together by the budget and finance ministers under strict orders from President Nicolas Sarkozy, who interrupted his Riviera holiday for an emergency meeting earlier this month.

Eight months from a presidential vote where he faces a tough battle for re-election, Sarkozy is steering clear of dramatic spending cuts of the kind imposed in Italy and Spain. His government has pledged instead more tax on high earners, in what analysts say is a symbolic gesture to sweeten the pill.

"These reforms will be fairly spread out in order to reduce the deficit and protect growth and jobs," Budget Minister Valerie Pecresse said, adding there would be no wide-ranging tax rises or reductions in welfare services.

The measures could instead target corporate tax credits and exemptions from welfare contributions on overtime, according to officials and other groups involved in consultations.

More belt-tightening became inevitable after France's €2 trillion economy stagnated in the second quarter, making it impossible to meet its deficit targets without further action.

The government had based its budget on growth of 2.0pc this year and 2.25pc in 2012, but economists now warn that growth could dip below 1.5pc next year.

The news came as business confidence in Germany fell to the lowest in more than a year as concerns about Europe's debt crisis damped the outlook for economic growth.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, dropped to 108.7 in August from 112.9 in July. That's the lowest since June 2010.

Economists forecast a decline to 111. The index reached a record high of 115.4 in February.

Germany's benchmark DAX Index has plunged almost 25pc since late July on fears that another global slump will sap demand for the country's exports, the main driver of its economic expansion.

The debt crisis is also curbing demand within the euro area as governments from Greece to Spain cut spending. German growth slowed to just 0.1pc in the second quarter from 1.3pc in the first, the Federal Statistics Office reported.

"The figures are quite disappointing but they're no reason to panic," said Juergen Michels, economist at Citigroup in London. "The economic recovery in Germany has seen its peak but we won't see growth stagnating as order books are full and domestic demand will kick in."

Ifo's gauge of the current situation decreased to 118.1 from 121.4, while an index measuring executives' expectations fell to 100.1 from 105.

Investor confidence plunged the most in five years this month, the ZEW Centre for European Economic Research in Mannheim said on Tuesday.

The Bundesbank said this week it still expects the German economy to expand about 3pc this year as unemployment, at a two-decade low, of 7pc bolsters household spending.

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