November 6th, 2011
04:11 PM GMT
The party’s over and the guests have finally gone. Now, it’s time to tackle the washing up.
After weeks of hosting summits in Brussels, then Cannes, designed to sort out everyone else’s problems, French President Nicolas Sarkozy returned to Paris at the weekend to tackle the economic battle on his home front.
The French Cabinet will hold a belated weekly meeting on Monday and the agenda is likely to be dominated by the nation’s home-grown austerity plans. The timing couldn’t be more apt, given the precarious nature of Greece (and France’s $56 billion exposure to it.)
If there’s one thing France has in common with its smaller, weaker eurozone neighbours - like Greece - it is that with growth stalling it is becoming increasingly difficult for such countries to keep to their deficit targets.
Just last month, France cut its growth outlook to 1 percent for next year from 1.75 percent. That figure had already been revised downwards from 2 percent during the summer. As growth slows, so the revenues otherwise needed to pay down the deficit also flow less freely.
This is why France has said it will need to push through an additional $8 billion to $11 billion worth of extra austerity, to make sure the public shortfall does not exceed its targeted 4.5 percent of GDP.
You see, France must show it is serious about tackling its finances - or else it could find itself losing its coveted AAA rating.
Just as what happens in Greece may affect France, what happens in France may have serious implications for sorting out Greece’s financial mess. This is because if France’s rating is cut, that would undermine the eurozone’s ability to raise cash for its bailout fund - or EFSF - for one of its main guarantors would appear less credit worthy.
So how much can France glean from the new proposals?
Le Journal du Dimanche reckons the new combination of additional tax hikes and spending cuts would likely include:
• Increasing VAT on restaurant bills, catering services and building works from 5.5 percent to 7 percent, maybe even 9 percent. Such a move would bring in between 1 and 3 billion euros.
• Companies with revenues of over 500 million euros could be asked to pay more tax. This could bring in a further one billion euros for state coffers.
• Health insurance reimbursements could be cut to 2.5 percent from 2.8 percent saving 500 million euros
• One of the public holidays could be cut, saving 2 billion euros
• The cost of government could be cut by 900 million euros.
These are some savings for sure, but as economists often caution, austerity must be accompanied by plans for growth to ensure the pain and gain aren’t mutually exclusive.
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