Hollande Faces Europe’s Glass-Half-Empty Test With Budget Plan

President Francois Hollande will attempt to show the European Commission that France is serious about public-spending cuts with his 2014 budget today, after changes to the pension system failed to impress.

“There’s always the question of whether the glass is half full or half empty” with France, European Economic Affairs Commissioner Olli Rehn said at a Sept. 13 meeting of euro-area finance ministers. “France is going in the right direction in terms of economic reforms but there is still much more to do.”

The remarks reflect Rehn’s tepid reception of Hollande’s pension-system tweaks, announced Aug. 28. When the Brussels-based commission gave Hollande two extra years to reduce France’s budget deficit in May, it urged the Socialist president to use the time to revamp Europe’s second-largest economy to bolster growth. With the pensions plan failing to pass muster, the 2014 budget may come in for tougher scrutiny.

“The retirement reform was disappointing compared with what could have been done — you almost hesitate to call it a reform,” said Philippe Gudin, chief European economist at Barclays Capital and a former official in the French finance ministry. “The reaction from Brussels on the budget will set the tone of things to come.”

The commission has gained an increased say in the national budgets of the 17 countries that use the euro as their currency. Under rules Hollande himself agreed to this year, the commission must be consulted on draft budgets before they are voted by national parliaments.

Budget Shortfall

Finance Minister Pierre Moscovici travels to Brussels tomorrow after presenting the tax and spending plans to the French cabinet today.

Moscovici published the outlines of the government plans Sept. 11 before meeting with Rehn in Vilnius, Lithuania, on Sept. 13. He pledged that of the 18 billion-euro ($24.3 billion) reduction in the budget deficit next year, 15 billion euros will come from spending cuts, while limiting tax increases to 3 billion euros.

France aims to trim the overall budget shortfall to 3.6 percent of gross domestic product next year from 4.1 percent this year. The 2013 figure represents a smaller cut from last year’s 4.8 percent than envisioned by the commission in May when it predicted a 3.9 percent French deficit.

Yet the finance ministry’s growth forecasts are — in a break from French tradition — in line with those of the commission. GDP will expand 0.1 percent this year and 0.9 percent in 2014, according to its predictions.

Pension Plan

For Rehn, the priority for Hollande should be keeping down taxes and labor costs in a country where public spending amounts to 57 percent of GDP — the European Union’s second-highest after Denmark — and unemployment is at a 14-year high.

Hollande’s pension plan involves lengthening work lives between 2020 and 2035, requiring 43 years of contributions for a full pension at the end of the period, up from 41 years now.

Yet it avoids lifting the retirement age from the current minimum of 62 or cutting the increase in pension payouts to less than inflation, opting instead to lift contributions starting next year. While the government has pledged to compensate businesses by cutting other charges, it has yet to provide details of those plans.

The pensions overhaul “must not add costs for business or discourage employment,” Rehn said Sept. 9 in Le Figaro newspaper. “We’re still waiting to hear how the negative impact on labor costs will be compensated.”

European Revolution

At the Sept. 13 finance ministers’ meeting in Vilnius, Moscovici played down reports of conflict with the commission, emphasizing that he has met three times with Rehn in less than two weeks and saying that its concerns are “legitimate.”

“France is a country that is changing quickly,” he said. “The objective is to have a more resilient economy.”

Holding down labor costs and reducing the tax burden are policies needed to revive French exports and investment, economists say.

Taxation has increased by 70 billion euros over the past three years and the tax burden amounted to 46.3 percent of GDP last year. The tax burden was already the third-highest among developed nations, behind Denmark and Sweden, in 2011, according to the Organization for Economic Cooperation and Development.

As a result, investment extended its decline in the second quarter even as consumer spending began to lift French growth after two years of stagnation.

“At the end of the day, the political economy looks different in Brussels than it does in national capitals,” said Antonio Barroso, an analyst at Teneo Intelligence in London. “You have to keep things in perspective: the French deficit is falling and countries are sending budgets to Brussels before they are adopted. That’s a revolution in European fiscal management.”

Source : bloomberg