France to cut spending as it anticipates a weaker economy ahead

France to cut spending as it anticipates a weaker economy ahead

France is entering an era of belt-tightening, as wars in Ukraine and Gaza, economic slowdowns in Germany and China and record interest rates weigh more than expected on growth.

The French will face cuts of 10 billion euros ($10.8 billion) in public spending, particularly on environmental subsidies and education, the government announced Thursday, in addition to the 16 billion euros of cuts announced a few months ago. Finance Minister Bruno Le Maire on Monday revised the forecast for economic growth this year to 1 percent, compared to 1.4 percent at the end of last year.

“Lower growth means lower tax revenues, so the government must spend less,” Mr. Le Maire told a press briefing.

After spending lavishly during the pandemic to support the economy and protect consumers from high energy prices, France now risks breaking European Union budgetary rules that restrict public borrowing. To avoid this, the government must cut costs to bring the deficit down to 4.4 percent of gross domestic product this year, from 4.8 percent previously.

Paris is increasingly concerned about the downgrading of French debt by international rating agencies, a move that would increase borrowing costs.

The French slowdown reflects the rapid recovery of Europe, which has failed to rebound as quickly as in the United States, where the economy, although slowing after dizzying growth, continues to be fueled by spending of consumption.

Economic growth has stagnated 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 year, growth in the euro zone was only 0.1 percent.

“The real problem is the growth gap between Europe and the American continent,” said Mr. Le Maire. “It’s the elephant in the room.”

Budget cuts pose a new challenge for President Emmanuel Macron. Now in the middle of his second term, he has attracted hundreds of billions in investment from multinational corporations in recent years. These include the creation of four massive electric car battery factories in northern France and a strengthened pharmaceutical industry with new investments from Pfizer as well as Novo Nordisk, which will increase production in France of its popular weight loss drugs Ozempic and Wegovy.

But elsewhere, a slowdown is palpable. Unemployment, which fell last year to 7 percent, its lowest level in 15 years, has started to rise again 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 focused on the economic slowdown, immigration issues and regulatory requirements imposed by the European Union to attract disenchanted voters.

Last month, Mr. Macron revived his government by appointing a new prime minister, his 34-year-old protégé, Gabriel Attal, who has called for a civic and economic “rearmament” of France. Mr Macron also promised more business-friendly measures and pledged to reduce France’s debt.

Le Maire said Europe’s anemic production 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 rebound was also hampered by a long energy crisis which dealt a heavy blow to Germany, dependent on its industry, Europe’s largest economy and France’s leading 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 implemented its own clean energy subsidies in response to American incentives.

The highest interest rates in the European Central Bank’s history haven’t helped. Inflation has started to slow, but high borrowing costs continue to dampen business activity and dampen the property market in parts of Europe, notably France, where property prices have fallen l last year as the decline in bank loans slowed down the purchase of homes.

Sales of existing homes in France fell 20 percent in the 12 months to October, compared with a year earlier, while sales of new homes plunged almost 40 percent, government data shows .

“The economic slowdown is the price we must pay for our victory over inflation,” said Mr. Le Maire.

Budget cuts in France, adopted by government decree on Thursday, will result in a halt to spending in key government agencies, including education, justice and defense. A significant share, 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 embarked on a series of unexpected spending this year to tackle several crises, including 400 million euros to help angry farmers who had threatened to blockade Paris over rising prices. costs, cheap imports and red tape from the EU, as well as paying police officers more money ahead of this summer’s Olympics in the French capital. The government also promised additional aid of 3 billion euros to Ukraine.

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David B.Otero

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