Resolving the euro crisis and tackling national competitiveness and the fiscal deficit are vital for its future, writes Pierre Moscovici.
A man begs on the streets of Marseille. The government is seeking to reform the labour market and the public service, but maintains that it will retain its cherished highly redistributive social model. Picture: Boris Horvat
Pedestrians walk outside a Printemps department store in Paris. France’s public debt reached €1,700bn last year. Picture: Balint Porneczi/Bloomberg
FRANCE is at a crossroads. It has numerous valuable assets, but it cannot postpone long-overdue reforms, or else it will become increasingly irrelevant in a fiercely competitive global economy.
This is the economic challenge that President François Hollande, prime minister Jean-Marc Ayrault, and all of us in the government must confront.
We face a historic responsibility: we need to modernise the French economy, and introduce in a few months a decade’s worth of reforms to generate stronger, more inclusive growth, create more jobs, and shrink public deficits.
This is precisely what the government has been doing since the election earlier this year; indeed, no French government has ever carried out so many reforms in such a short period of time.
The country’s economic performance has been lacklustre during the past 10 years, particularly with respect to competitiveness, debt sustainability, public spending, and the labour market. Our responsibility is to ensure that we are doing better in each of these areas by 2017, when the current electoral term expires.
We have designed an economic strategy that rests on three pillars: Europe, fiscal consolidation, and competitiveness.
Europe is our number one priority: stabilising the eurozone and resolving its current crisis are essential to stability and economic recovery in France.
Hollande’s government insists that we will be successful only if three conditions are met. First, Europe should adopt a balanced approach to fiscal consolidation — a necessary process, but self-defeating when carried out too quickly. We must then break the perverse feedback loop between banking risk and sovereign risk at the heart of the euro crisis.
This requires implementing a fully-fledged banking union — with a pan-European supervisor and a strong regime for banking resolution and deposit insurance — as soon as possible. Finally, in the medium to long term, we must complete the eurozone integration process and move forward on solidarity and risk-sharing, for example, by setting up a eurozone-specific budget.
In late November, the eurozone finally agreed on a partial rescheduling of Greece’s debt to alleviate the country’s financial burden. It was a critical step toward stabilisation, but more must be done. In 2013, we will have to turn our gaze to other countries (such as Cyprus and Spain), and ensure that we maintain the momentum needed to build a banking union.
Fiscal consolidation is the second pillar of France’s economic strategy. France has not adopted a balanced budget in the last 30 years, and public debt reached an unsustainable €1.7 trillion in 2011. Our duty is to rise to the occasion.
France is fully committed to a fiscal-consolidation effort that returns it to a balanced budget by 2017. This is not just a political commitment; we have enshrined France’s fiscal path in a law adopted in November.
The coming year will be a milestone on this path: France is targeting a 3%-of-GDP budget deficit in 2013, down from 5.2% in 2011 and 4.5% in 2012, and a lower debt/GDP ratio from 2014 onward. This is an ambitious commitment, and one that we intend to meet without resorting to an old-fashioned “tax and spend” fiscal policy: over the next five years, spending cuts will be larger than tax increases, reaching €60bn over five years.
We will have to modernise France’s administration to achieve this, looking to other countries for best practices. But the challenge for the coming five years will be to adapt and upgrade our institutions without undermining the quality of public services, which is part and parcel of competitiveness.
Finally, we have committed ourselves to measures aimed at addressing France’s weakened competitiveness, via a pact for growth, competitiveness, and employment, which includes a €20bn cut in labour costs for employers, to be phased in over three years. A new corporate tax credit will cut payroll taxes by 6% for all wages below 2.5 times the minimum wage — a step that will benefit more than 80% of all salaried workers.
And, because expectations for France’s competitiveness agenda are high, we will ensure swift implementation of the national pact so that it can start producing results as soon as 2013. We have designed the corporate tax credit to maximise its positive impact on the economy: labour costs will fall immediately without depressing aggregate demand in 2013, because the spending cuts (€10bn) and household tax increases that will fund the credit will begin only in 2014.
The pact also improves the business environment and creates mechanisms, such as extending a research tax rebate.
Last but not least, we have launched a major labour market reform that will establish our own version of northern Europe’s “flexicurity” model. Firms need more flexibility to adjust their payrolls in adverse economic conditions; and workers need more security, provided by better training and active labour market policies.
We are committed to reform. But we are committed to doing so while remaining true to our political convictions, and without jeopardising what makes France both strong and special: a highly redistributive social model. Europe will be part of the solution, if we can agree that more solidarity is the next step in our shared journey.
Europe needs more solidarity not only to overcome the crisis and complete the eurozone integration process, but also to bridge the widening divide between Europe and its peoples.
I look forward to 2013 as a year of progress on our national and European agendas alike. They are, after all, two sides of the same coin.
* Pierre Moscovici is France’s minister of the economy and finance. Copyright: Project Syndicate, 2012
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