Friday 28 July 2017

Crisis of French confidence as economic failure looms

France's president Nicolas Sarkozy and his wife Carla Bruni-Sarkozy attend a Christmas party at the Elysee Palace in Paris on Wednesday. The financial crisis and
resulting austerity measures have given the French president a huge task to get re-elected in May. His main rival is currently leading in opinion polls.
France's president Nicolas Sarkozy and his wife Carla Bruni-Sarkozy attend a Christmas party at the Elysee Palace in Paris on Wednesday. The financial crisis and resulting austerity measures have given the French president a huge task to get re-elected in May. His main rival is currently leading in opinion polls.

James Kirkup in London

FRANCE is staring into the abyss today, facing fundamental challenges to its political and economic status, and perhaps even its idea of itself as exceptional and, yes, a little better than the rest of us.

The origin of the challenge is the crisis in the eurozone, the catastrophic loss of market confidence in the debts of European nations that has raised doubts about the single greatest achievement of the EU, the single currency.

Since its inception, the European project has been based on a partnership between France and Germany, the two old enemies "shaking hands over the graves of Verdun", as a Frankfurt newspaper once put it.

This has never been a partnership of equals: Germany's economic heft has always exceeded that of France, but France has compensated with more assertive diplomacy. That formula worked for decades, as Germany quietly accepted a situation that effectively saw German taxpayers underwriting French politicians' ambitions.

The recent crisis has ended the illusion of parity. Germany, its public finances robust and its growth solid, is the only European economy with the clout to rescue struggling southern nations. That economic fact has had political consequences.

Talk of Angela Merkel and Nicolas Sarkozy merging into a single entity known as Merkozy ignores the fact the German chancellor has the upper hand and the French have not always been able to get their way.

Despite Mr Sarkozy's boasts to the contrary, Mrs Merkel has not always been talked around to the French way of thinking over the euro. For better or for worse, it is the German chancellor and her voters who have set the pace of Europe's response to the crisis.

But if the loss of political dominance is troubling for France, it still pales in comparison to the economic questions the country faces.

In a cliched analysis, Europe's economies divide into industrious, frugal northerners who run budget surpluses and indolent, spendthrift southerners with deficits.

Yet France does not clearly belong to either group, showing characteristics of both: world-beating industries combine with workers whose holidays, working hours and benefits are almost Greek in generosity.

In the euro crisis, France likes to think of itself as like Germany, part of the solution. But some in the financial markets ask if it is not, in fact, part of the problem.

Threats from agencies like Standard and Poor's to reduce France's AAA credit rating sparked fury in France. That rating is the hallmark of a first-rank economy; its loss would put France in the global second division.

The fact that all three of the major credit ratings agencies are American has inevitably led to French allegations of an "Anglo-Saxon" conspiracy against France and the European project.

France, of course, prides itself on its unique and superior economic model, rejecting unchecked free markets and giving the state a much bigger role in industry and commerce.

But taking a different path has not saved the French public finances.

France's deficit is 5.8pc of GDP this year, smaller than Britain's 8.8pc, but still well above Germany's 1pc, and even Italy's 4.4pc. The French economy will grow around 1.6pc this year, barely half the German rate.

And for all the talk of different models and rejection of the "Anglo-Saxon way", France has made economic decisions that will be quite familiar to Britons as Mr Sarkozy desperately tries to avert the humiliating loss of that AAA rating.

Francois Fillon, the prime minister, has pledged to clear the French government deficit by 2016, something that will require around €100bn of fiscal tightening. That's roughly similar to the British austerity programme, though the French refer to "rigour".

In August, Mr Fillon outlined a €12bn package of "rigour". It wasn't enough for the markets, and last month, he returned with €65bn worth of spending cuts and tax increases.

The measures will have a direct impact on French lives. The French retirement age, now 62, will creep upwards slightly more quickly than planned. Around €8bn more will be raised in VAT on everyday goods and services.

Some of those cuts have proved at least as unpopular with the French as their British equivalents.

Britain and France may both have centre-right leaders making cuts, but there is a major political difference between the two. David Cameron's coalition can hope to stay in office until 2015. Mr Sarkozy must seek re-election in May.

The president's Socialist opponent, Francois Hollande, leads in opinion polls, largely due to his populist opposition to the Sarkozy austerity programme.

By contrast, among those seen as supporting Mr Sarkozy is Christian Noyer.

The Bank of France governor has almost as much to lose as his president from a French downgrade. (© Daily Telegraph, London)

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