Complacency Sowing Seeds Of Disaster
BMI View: Despite all of the tough rhetoric, the 2014 French budget represents no more than a modest adjustment to government spending, coupled with further tax hikes. We believe that having passed through the outbreak of the eurozone sovereign debt crisis relatively unscathed, France has been deprived of any impetus to undertake the structural reform it urgently requires. Coupled with an executive lacking a proper reform mandate, France is on a collision course with Germany which carries negative wider implications for eurozone stability going forward.
Echoing the ambitious rhetoric of last year's budget, Hollande promised the 2014 budget would contain 'unprecedented' spending cuts , but once again has failed to undertake more than modest adjustments to state spending, while maintaining a reliance on further tax hikes to narrow the deficit. While even Hollande is starting to acknowledge the limits of further taxation, and has announced his intention for a 'fiscal pause', this will not feature in the 2014 budget . Indeed, Finance Minister Pierre Moscovici described the new budget as achieving a 'quasi-stabilisation of taxation' - in our opinion, a euphemistic way of saying that state spending w ill not fall next year , leaving France's am ong the highest in the eurozone, at 57% of GDP in 2012.
It increasingly appears that Hollande's strategy is to hope that the deep reforms undertaken by other countries will be sufficient to restore economic activity , allowing France to ride on the tailcoats of stronger regional growth without having to push through any painful domestic reforms and risk further damaging his party's credibility.
|Government Spending Is Still Among The Highest|
|Government Spending In 2012, % GDP|