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French economy clouded by weak growth, deficit doubts

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(Globalpost/GlobalPost)

The weak state of the French economy and uncertain outlook for budget targets was in focus on Wednesday after official data confirmed that the country is in recession.

Meanwhile, amid a row over the outlook for respecting EU conditions for the budget, a lawmaker hinted at a further relaxation of the rules.

Weak growth and public finances in France are of acute concern to the European Commission and to Germany which is the main powerhouse in the eurozone.

The figures are also watched closely on nervous financial markets.

The latest figures from the national statistics institute INSEE showed that the economy contracted by 0.2 percent in the first quarter.

This followed shrinkage of the same amount in the last quarter of last year, meaning that France fell back into recession as defined by two quarters running of contraction in output.

INSEE warned that if output is flat in each of the last three quarters of this year, France would post a recession of 0.3 percent for the year.

INSEE had said on Thursday that the economy was set be remain sluggish throughout 2013, and gave its own assessment that for the whole year it would shrink by 0.1 percent.

Weak growth in an economy usually means falling tax receipts, and the right-wing opposition has launched an offensive against the Socialist government this week, arguing that tax receipts are lower, and the outlook for the public deficit higher, than the government says.

In March, President Francois Hollande acknowledged that France would not achieve its initial target of reducing the deficit to the European Union ceiling of 3.0 percent of output in 2013, and said the target was now 3.7 percent.

But a report in the newspaper Les Echoes said on Wednesday that the public accounting office, in an audit to be published on Thursday, would say that the public deficit this year is heading to be 3.7-4.2 percent of gross domestic product.

The outcome depended on how the economy performed, but on the basis of the government's 0.1 percent growth forecast, the deficit would be 3.7-4.0 percent of output.

-- 'Deadlines could be reviewed' --

On Tuesday, the president of the finance commission in the lower house National Assembly, Gilles Carrez, said that tax revenue this year would fall 15.0 billion euros ($20 billion) short of targets.

State spending was overshooting by 5.0 billion euros, he asserted.

Budget Minister Bernard Cazeneuve hit back, saying that this ran counter to the facts and that the government was exercising budget rigour.

However, on Tuesday the member of the assembly responsible for reporting on the budget, a Socialist Christian Eckert, said he wanted the targets for France to reduce its structural deficit to be "reviewed".

The difference between the structural deficit and the overall deficit is that the overall figure includes the effects of cyclical downturn, for example the extra cost of any temporary rise in unemployment benefits and fall in tax revenues which will be corrected when the economy picks up.

The structural deficit is a measure of underlying weakness in tax revenues and of overspending.

Saying that he had just seen Finance Minister Pierre Moscovici, Eckert commented: "We are in the process of discussing with Brussels (the EU) on what is known as the structural deficit".

He told a press conference by the Socialist group at the assembly: "Here again, the deadlines could be reviewed, in any case I hope so."

At the end of May, the European Commission allowed France an extra two years to meet the 3.0 percent deficit target. But this was on strict condition that France pursue structural reform of the economy, notably of the pension system and of employment laws.

Cazeneuve said in April that France hoped to reduce the structural deficit by one percentage point in 2014, saying that this would bring the total structural reduction to 4.0 percentage points in four years.

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http://www.globalpost.com/dispatch/news/afp/130626/french-economy-clouded-weak-growth-deficit-doubts