France Will Cut Spending as It Sees a Weaker
Economy Ahead
War, high interest rates and slowdowns in major trade
partners are trimming tax revenue and forcing the government in Paris to scale
back.
Liz
Alderman
By Liz
Alderman
Reporting
from Paris
Feb. 23,
2024, 12:01 a.m. ET
France is
entering an era of belt-tightening, as the wars in Ukraine and Gaza, economic
slowdowns in Germany and China and record-high interest rates take a
bigger-than-expected toll on growth.
The French
will find themselves faced with cuts of 10 billion euros ($10.8 billion) in
government spending, on items including environmental subsidies and education,
the government announced Thursday, on top of €16 billion in cuts announced a
few months ago. The finance minister, Bruno Le Maire, on Monday revised the
forecast for economic growth this year to 1 percent, down from 1.4 percent at
the end of last year.
“Lower
growth means lower tax receipts, so the government must spend less,” Mr. Le
Maire said at a news briefing.
After
spending lavishly during the pandemic to support the economy and shield
consumers from high energy prices, France is now at risk of breaching European
Union budget rules that restrict government borrowing. To avoid that, the
government must cut costs to lower the deficit to 4.4 percent of gross domestic
product this year, from 4.8 percent
Paris is
increasingly concerned about French debt’s being downgraded by international
rating agencies, a move that would increase borrowing costs.
The French
slowdown mirrors the tepid recovery across Europe, which has failed to bounce
back as quickly as the United States, where the economy, although slowing from
breakneck growth, continues to be powered by consumer spending.
Economic
growth has flatlined in the 20 countries that use the euro: no growth in the
last three months of 2023 versus the previous quarter, narrowly avoiding a
recession after a contraction in the third quarter. For the year, the eurozone
grew just 0.1 percent.
“The real
issue is the growth gap between Europe and the American continent,” Mr. Le
Maire said. “That is the elephant in the room.”
“The
economic slowdown is the price we have to pay for our victory over inflation,”
said France’s economy minister, Bruno Le Maire.Credit...Pool photo by Teresa
Suarez
The budget
cutbacks pose a fresh challenge for President Emmanuel Macron. Now in the
middle of his second term, he has attracted hundreds of billions in investment
commitments from multinational companies in recent years. These include the
creation of four massive battery plants for electric cars in northern France
and a beefed-up pharmaceutical industry with new investments from Pfizer as
well as Novo Nordisk, which will expand production in France of its popular
Ozempic and Wegovy weight-loss drugs.
But
elsewhere, a slowdown has been palpable. Unemployment, which fell last year to
a 15-year low of 7 percent, has ticked back up as manufacturers curb production
and exports slow. Consumers, wary of high inflation, have also cut spending, a
key driver of growth.
At the same
time, Mr. Macron is trying to counter the rise of Marine Le Pen’s far-right
National Rally party, which has seized on the economic slowdown, immigration
issues and regulatory requirements imposed by the European Union to attract
disenchanted voters.
Last month,
Mr. Macron rebooted his government, appointing a new prime minister, his
34-year-old protégé, Gabriel Attal, who called for a civic and economic
“rearmament” of France. Mr. Macron also pledged more pro-business measures and
vowed to reduce France’s debt.
Mr. Le
Maire said Europe’s anemic output was especially troubling because structural
issues, including environmental, labor and other regulatory standards, made it
more difficult to narrow the competitive divide with the United States.
Europe’s
rebound has also been held back by a lengthy energy crisis that dealt a heavy
blow to industry-dependent Germany, Europe’s largest economy and France’s
biggest European trading partner.
And
European governments are frustrated by President Biden’s Inflation Reduction
Act, which some view a protectionist industrial policy that threatens their
economies. The European Union has been pursuing its own clean energy subsidies
in response to the U.S. incentives.
The highest
interest rates in the European Central Bank’s history have not helped.
Inflation has started to cool, but lofty borrowing costs continue to curb
business activity and dampen the real estate market in parts of Europe,
including France, where housing prices slid last year as a pullback in bank
lending slowed home buying.
Existing-home
sales in France slumped 20 percent in the 12 months to October, compared with a
year earlier, while new-home sales plunged nearly 40 percent, according to
government data.
“The
economic slowdown is the price we have to pay for our victory over inflation,”
Mr. Le Maire said.
The budget
cuts in France, enacted by government decree on Thursday, will pare spending at
key government agencies, including education, justice and defense. A hefty
chunk, around €2 billion, will come out of a program to help households and
businesses meet tough E.U. environmental standards.
The cuts
were deemed necessary after the government shelled out a series of unexpected
expenses this year to deal with several crises, including €400 million to help
angry farmers who had threatened to blockade Paris over rising costs, cheap
imports and E.U. paperwork, as well as to pay police officers more money ahead
of this summer’s Olympic Games in the French capital. The government has also
promised an additional €3 billion in aid to Ukraine.
Liz
Alderman is the chief European business correspondent, writing about economic,
social and policy developments around Europe. More about
Liz Alderman
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