It ain’t necessarily lost

French election could help propel reform
16 November 2011 | By Pierre Briançon

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A presidential campaign is a terrible thing to waste. In France, a waste would be especially destructive. Investors are finally worrying about the government’s ability to manage its finances and country’s growth potential – the gap between French and German 10-year bond yields has widened from 80 to 190 basis points since the beginning of October. The concern is justified. In government finances, France is closer to Portugal than to Germany.

Candidates who are desperate for votes are always tempted to unleash rival populist proposals, in effect promises to make the situation worse. A much better approach for President Nicolas Sarkozy and his main opponent, socialist François Hollande, would be to agree on the essentials and argue about the details. Then voters would have a choice that is both clear and realistic.

In the short-term, the common goal is fiscal. Investors will flee if there is any sign of hesitation about the official goal of a budget deficit of no more than 3 percent of GDP in 2013. The incumbent finance minister described that target as “sacrosanct” but Hollande has not yet pledged to do whatever it takes to get there. The Socialist party should acknowledge that taxing the rich will not be enough to regain fiscal credibility.

Of course any fiscal plan should rely on the most credible economic forecast – and to be on the safe side, this means the most pessimistic ones.

The long-term goal is to deal with France’s fast-declining competitiveness, seen in ever widening trade and current accounts deficits. The candidates don’t need to agree on the remedies. But the left must admit that the bloated state machine needs fixing, while the right should acknowledge that pain must be shared equitably.

In the 2008-2009 downturn, France was wise enough to avoid cutting growth-friendly spending such as long term investment programmes. Now bolder and tougher reforms are in order, starting with the liberalisation of services and a determined action on labour costs. A lively and realistic debate on how best to reach the agreed goal would be good for the nation – and the euro.

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Context News
The European Central Bank should be “an important element of the answer” to the euro debt crisis, French finance minister François Baroin said in an interview in Les Echos on Nov. 16.

The yields on 10-yr French government bonds rose as high as to 3.72 percent on Nov. 16, with the spread over German Bunds of same maturity at euro-era highs of 190 basis points.