France is entering an era of austerity as wars in Ukraine and Gaza, economic downturns in Germany and China and record high interest rates hit growth more than expected.
The French will face 10 billion euros ($10.8 billion) in government spending cuts, including in environmental subsidies and education, the government announced on Thursday, on top of cuts announced a few months ago of 16 billion euros. Finance Minister Bruno Le Maire on Monday revised the forecast for economic growth this year to 1 percent from 1.4 percent at the end of last year.
“Lower growth means lower tax revenues, so the government has to spend less,” Le Maire told a news conference.
After spending heavily during the pandemic to support the economy and protect consumers from high energy prices, France now risks violating European Union budget rules that restrict government borrowing. To prevent this, the government must cut costs to reduce the deficit from 4.8 percent to 4.4 percent of gross domestic product this year
Paris is increasingly concerned about the downgrade of French debt by international rating agencies, which would raise borrowing costs.
The slowdown in France reflects the tepid recovery across Europe, which has not recovered as quickly as the United States, where the economy is slowing after rapid growth but remains driven by consumer spending.
Economic growth has flattened in the 20 countries that use the euro: no growth in the last three months of 2023 compared to the previous quarter, narrowly avoiding a recession after a contraction in the third quarter. Over the course of the year, the Eurozone grew by just 0.1 percent.
“The real problem is the growth gap between Europe and the Americas,” said Le Maire. “That’s the elephant in the room.”
The budget cuts present President Emmanuel Macron with a new challenge. Now, in the middle of his second term in office, he has raised hundreds of billions in investment commitments from multinational corporations in recent years. These include the construction of four huge battery factories for electric cars in northern France and a strengthened pharmaceutical industry with new investments from Pfizer and Novo Nordisk, which will expand production of their popular weight loss drugs Ozempic and Wegovy in France.
But a slowdown is noticeable elsewhere. Unemployment, which fell to a 15-year low of 7 percent last year, has risen again as manufacturers cut production and exports slow. Consumers worried about high inflation have also cut spending, a key growth driver.
At the same time, Mr Macron is trying to counter the rise of Marine Le Pen's far-right Rassemblement Nationale, which is exploiting the economic downturn, immigration problems and regulatory constraints imposed by the European Union to attract disaffected voters.
Last month, Mr. Macron restarted his government and appointed a new prime minister, his 34-year-old protégé Gabriel Attal, who called for a civil and economic “rearmament” of France. Mr Macron also pledged further pro-business measures and vowed to reduce France's debt.
Mr. Le Maire said Europe's weak manufacturing was particularly worrying because structural problems, including environmental, labor and other regulatory standards, made it harder to narrow the competitive gap with the United States.
Europe's recovery was also slowed by a protracted energy crisis that dealt a severe blow to industrial-dependent Germany, Europe's largest economy and France's largest European trading partner.
And European governments are frustrated with President Biden's Inflation Reduction Act, which some see as a protectionist industrial policy that threatens their economies. The European Union has pursued its own clean energy subsidies in response to the U.S. stimulus.
The highest interest rates in the history of the European Central Bank have not helped. Inflation has begun to cool, but high borrowing costs continue to slow business activity and dampen the real estate market in parts of Europe, including France, where property prices fell last year as a decline in bank lending slowed home purchases.
Sales of existing homes in France fell 20 percent in the 12 months to October compared to a year earlier, while sales of new homes fell nearly 40 percent, according to government data.
“The economic downturn is the price we have to pay for our victory over inflation,” said Le Maire.
France's budget cuts, approved by government decree on Thursday, will slash spending on key government agencies, including education, justice and defense. A significant portion, around €2 billion, will come from a program to help households and businesses meet strict EU environmental standards.
The cuts were deemed necessary after the government approved a series of unexpected spending to deal with several crises this year, including 400 million euros to help angry farmers who had threatened to block Paris over rising costs, cheap imports and EU paperwork Police officers are being paid more money ahead of the Olympic Games in the French capital this summer. The government has also promised Ukraine an additional three billion euros in aid.
Comments are closed.