France will make cuts because the country sees the prospect of a weaker economy
France is entering an era of belt-tightening as 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 face cuts of 10 billion euros ($10.8 billion) in government spending, including on environmental subsidies and education, the government announced Thursday, on top of the 16 billion euros in 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,” Le Maire said at a news briefing.
After spending lavishly during the pandemic to support the economy and protect consumers from high energy prices, France now risks breaking European Union budget rules that limit government borrowing. To prevent that, the government must cut costs to reduce the deficit to 4.4 percent of gross domestic product this year from 4.8 percent
Paris is increasingly concerned about the downgrade of French government bonds by international rating agencies, a move that would increase financing costs.
France’s slowdown reflects the tepid recovery across Europe, which has failed to recover as quickly as in the United States, where the economy, even as it slows from breakneck growth, is still driven by consumer spending.
Economic growth has leveled off in the twenty 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. This year the eurozone grew by only 0.1 percent.
“The real problem is the growth gap between Europe and the Americas,” Le Maire said. “That’s the elephant in the room.”
The 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 commitments from multinational companies in recent years. These include the creation 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 in France of its popular weight-loss drugs Ozempic and Wegovy.
But elsewhere a slowdown is palpable. Unemployment, which fell to a 15-year low of 7 percent last year, has risen again as manufacturers slowly cut production and exports. Consumers, wary of high inflation, have also cut back on spending, a key driver of growth.
At the same time, Macron is trying to counter the rise of Marine Le Pen’s far-right National Rally party, which has taken advantage of the economic slowdown, immigration problems and legal requirements imposed by the European Union to attract disenchanted voters.
Last month, 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 promised more measures to benefit business and pledged to reduce France’s national debt.
Mr. Le Maire said Europe’s anemic output was especially troubling because structural problems, including environmental, labor and other regulatory standards, made it harder to narrow the competitiveness gap with the United States.
Europe’s recovery is also hampered by a long-term energy crisis dealt a heavy blow to industry-dependent Germany, Europe’s largest economy and France’s largest European trading partner.
And European governments are frustrated by President Biden’s Inflation Reduction Act, which some say is a protectionist industrial policy that threatens their economies. The European Union has pursued its own clean energy subsidies in response to U.S. stimulus.
The highest interest rates in the history of the European Central Bank have not helped. Inflation has started to cool, but high borrowing costs continue to curb business activity and dampen the property market in parts of Europe, including France, where house prices fell last year as a slump in bank lending slowed home purchases.
Sales of existing homes in France fell 20 percent in the 12 months to October from a year earlier, while sales of new homes fell almost 40 percent, according to government data.
“The economic slowdown is the price we have to pay for our victory over inflation,” Le Maire said.
The cuts in France, implemented by government decree on Thursday, will reduce spending at key government agencies, including education, justice and defense. A large part, around 2 billion euros, will come from a program to help households and businesses meet strict EU environmental standards.
The cuts were deemed necessary after the government made a series of unexpected expenditures this year to deal with several crises, including 400 million euros to help angry farmers who had threatened to blockade Paris over rising costs, cheap imports and EU paperwork . to pay police officers more money in the run-up to this summer’s Olympic Games in the French capital. The government has also promised another 3 billion euros in aid to Ukraine.