The Freeland File
Global Market Data
Tales from the Trail
Lucy P. Marcus
David Cay Johnston
The Great Debate
Jack & Suzy Welch
Macro & Markets
Lipper Awards 2012
Personal Finance Video
Our best photos from the last 24 hours. See more
Images of April
Playboy model steals the show at Mexican election debate
07 May 2012
Republican Santorum endorses Romney for president
Obesity fight must shift from personal blame-U.S. panel
Netanyahu surprise gives Israel grand coalition
Boy, 11, Pees on $36,000 Worth of MacBooks
01 May 2012
One in seven thinks end of world is coming: poll
April hiring seen picking up
Berkshire profits double as insurance losses fall
Hungry zoo lion faces off with unfazed toddler
Thu, May 3 2012
U.S. foils airline 'bomb plot'
Mon, May 7 2012
"The Avengers" breaks a record, Lohan off the hook
Sun, May 6 2012
Our day's top images, in-depth photo essays and offbeat slices of life. See the best of Reuters photography. See more | Photo caption
Walking amongst us are the superheroes, whether they're for voting, promoting or protesting. Slideshow
The "Run for Your Lives" race has runners facing obstacles while being chased by zombies. Slideshow
France's Hollande may roll back spending promises
Hollande, Sarkozy show rare unity in VE Day in Paris
Analysis & Opinion
Europe’s new, suicidal normal
Essential reading: Offshore tax havens’ links to crime, budget choices, and more
European fears hit euro and shares
France's newly-elected President Francois Hollande waves as he leaves his campaign headquarters in Paris May 7, 2012, a day after the French presidential election.
Credit: Reuters/Benoit Tessier
By Daniel Flynn
Tue May 8, 2012 10:09am EDT
PARIS (Reuters) - France's Socialist president-elect Francois Hollande may use a summer audit of state finances to water down his generous campaign promises rather than risk a backlash from financial markets against stubbornly high deficits and rising debt.
Advisers say he could even freeze some spending if the review turns up any nasty surprises, soothing investors who are worried he has become the figurehead for a fight against German-imposed austerity in the euro zone.
Hollande, due to take office next week after toppling President Nicolas Sarkozy in Sunday's election, dismayed analysts with his campaign spending promises, such as hiring 60,000 school staff and creating 150,000 state-aided jobs.
France already has one of the highest levels of public spending in Western Europe, at around 55 percent of GDP, and has not balanced its budget since 1974.
But Hollande, a 57-year-old graduate of France's elite ENA civil service school, together with other Socialist leaders has already been discretely preparing the ground to play a more cautious game.
"There are certainly deficits, things hidden in the shadows," Jean-Marc Ayrault, the Socialists' parliamentary leader and a candidate for prime minister, said of the audit.
"We will discover the reality and strike a balance between fostering growth and making the necessary efforts to reduce the debt."
Those close to Hollande are now urging him to use the review by the country's top audit body, the Cour des comptes, as a justification for lowering his growth forecasts for the euro zone's No.2 economy, widely seen as too optimistic.
Advisors are pressing him to pare back spending in certain areas, particularly the deficit-ridden social security system, and to raise taxes by eliminating widespread exemptions and raising the CSG welfare charge on income and capital revenues.
"There are holes in the program on the spending side and we will be obliged to take action," said one long-standing advisor, who asked not to be identified.
WINDOW OF OPPORTUNITY
The situation is delicate for Hollande after he promised change to voters tired of unemployment running at 12-year high of nearly 10 percent and talk of spending cuts.
Sarkozy, despite his tough rhetoric, took only tentative steps to putting France's finances on an even keel and the country was stripped of its prized triple-A credit rating by Standard & Poor's on his watch.
In a strongly-worded report in February likely to presage its summer findings, the court, a quasi-judicial body, said at the current pace it would take 10 years to eliminate the deficit, which ended last year at 5.2 percent of gross domestic product. It said public debt was approaching a "danger zone" of 90 percent of GDP.
With markets edgy, the Socialists will have to be careful how they manage the Court's report. In February, Spain's new conservative government sent shockwaves through euro zone markets after it uncovered a worse-than-expected deficit of 8.5 percent of GDP from its Socialist predecessor.
"It will certainly not be on that scale but the Court of Audit always finds some bad surprises," Jerome Cahuzac, the Socialist head of the National Assembly finance committee and a possible candidate for budget minister, told Reuters.
Aware of the political risk of angering left-wing voters, Hollande's advisors say he must act within two months of taking office on May 15, allowing the Socialists to point the finger at Sarkozy's outgoing government.
Any announcement would likely be after June 10 and 17 parliamentary elections, essential for Hollande to gain a working majority for legislation.
"We have a window of opportunity, but it has to be done quickly," said a second Hollande advisor.
Some economists have warned that the election of a tax-and-spend Socialist, with no agenda for much-needed structural reform in France, could plunge the heart of the euro zone into disarray as the situation deteriorates in Spain and Greece.
But Socialist heavyweights have emphasized they will be fiscally responsible, as well as planning reforms to improve France's flagging competitiveness - though these do not include the German-style wage restraint which Sarkozy advocated.
"No-one can expect us to arrive and give everyone handouts. That is not the reality of the situation," said Michel Sapin, who oversaw Hollande's program and is tipped as a future finance minister. "Joy...gives way very, very quickly to responsibility."
The Socialists say research and innovation, production quality, speed and flexibility are more important than cutting wages, which could hurt domestic consumption.
While Sarkozy clashed head on with France's powerful unions, the Socialists' closer ties with them - particularly the moderate CFDT - may allow them to accomplish bolder reforms.
Hollande wants a deal on an overhaul of the retirement system at a conference with unions in the autumn, to put the loss-making system permanently in the black. Socialists say this could vastly improve state finances with no short-term negative impact on growth.
In the meantime, financial markets - jittery after Greece's weekend elections cast its future in the euro zone into doubt - will impose a financial corset on the Socialists.
With debt forecast to peak at nearly 90 percent of GDP next year, France is already paying out around 2.5 percent of GDP in interest payments, even with interest rates at record lows. This would spike much higher if the markets lost faith in France.
GROWTH TOO OPTIMISTIC
To keep his promise to balance the budget by 2017, Hollande wants to find 100 billion euros: half from new revenues and half from limiting growth in public spending to 1.1 percent per year - a small cut once inflation is taken into account.
But his plans are based on optimistic growth assumptions of 1.7 percent of GDP next year, rising to an average 2.5 percent after 2013. France's trend growth rate for the last 20 years has been 1.6 percent, and economists expect that to dip to 0.9 percent this year.
"The Court is not going to find any big holes in government finances because national accounting in France is very serious, but the problem will be the growth: the forecasts are too optimistic," said the second advisor.
Going on past form, the Court will recommend a mix of tax rises and spending cuts to plug the deficit. It has also said the social security system deficit was unprecedented in Europe and must be cut by trimming spending.
Such considerations may influence an extraordinary session of parliament in July which Hollande is due to convene to pass a revised 2012 budget and a medium-term spending plan.
The month-long session is scheduled to pass legislation ending several tax exemptions, imposing tax surcharges on banks and oil companies, approving a top tax rate of 75 percent for the wealthy and quashing a social VAT introduced by Sarkozy.
(Additional reporting by Yves Clarisse and Catherine Bremer; editing by Anna Willard)
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Back to top
New York Legal
Support & Contact
Connect with Reuters
Our Flagship financial information platform incorporating Reuters Insider
An ultra-low latency infrastructure for electronic trading and data distribution
A connected approach to governance, risk and compliance
Our next generation legal research platform
Our global tax workstation
About Thomson Reuters
Thomson Reuters is the world's largest international multimedia news agency, providing investing news, world news, business news, technology news, headline news, small business news, news alerts, personal finance, stock market, and mutual funds information available on Reuters.com, video, mobile, and interactive television platforms. Thomson Reuters journalists are subject to an Editorial Handbook which requires fair presentation and disclosure of relevant interests.
NYSE and AMEX quotes delayed by at least 20 minutes. Nasdaq delayed by at least 15 minutes. For a complete list of exchanges and delays, please click here.