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France' s economic situation

France’ s economic situation

Published on January 17, 2012
Excerpts from the press conference given by François Fillon, Prime Minister
Paris, January 14, 2012

THE PRIME MINISTER – Ladies and gentlemen, yesterday the rating agency Standard and Poor’s took decisions concerning 16 Euro Area countries. President Sarkozy and I didn’t have to wait for the judgment of a rating agency to know what our duties are: to reduce our deficits, improve our competitiveness and give the Euro Area the governance it’s lacking. This decision had been expected, even though it can be regarded as untimely in terms of the efforts made by the Euro Area – efforts which investors are also beginning to recognize. The financial markets, moreover, didn’t react very much on Friday to the rumours that preceded the official announcement by Standard and Poor’s.

This decision is a warning sign that mustn’t be dramatized any more than it must be underestimated, because the drift in our public finances for three decades is a major handicap for growth, employment and our national sovereignty, but also because the inadequacies in European governance must be put right. With regard to France, our rating has been reduced by one grade: it’s gone from AAA to AA+. Let me remind you that there are 21 rating grades at Standard and Poor’s: France scored 21 out of 21 and she now scored 20 out of 21. So France’s grade is still among the best in the world, along with – let me remind you, according to that agency – the United States.

The agency justifies its decision, first of all, on the grounds of the situation in the Euro Area and its impact on us. For all that, it confirms that our economy is solid, diversified and resilient. It emphasizes that the government has implemented the necessary reforms and that it’s applying a credible deficit- and debt-reduction strategy. (…)

France is a safe country, a country in which investors have confidence and can have confidence. The rating agencies are useful barometers but it’s not they who decide France’s policy. The decisions taken at the European summit of 9 December 2011, the measures implemented by the European Central Bank and the reforms undertaken by the government prove that France didn’t have to wait for the decision by Standard and Poor’s in order to act with determination in support of a lasting solution to the Euro Area crisis. People must be wary of overreacting: this decision comes from a rating agency, and it would be paradoxical to give it a significance it doesn’t have and turn it into a political tool. (…)

Everyone must keep their cool and shoulder their responsibilities.

I want to tell you that the government will shoulder its responsibilities. It’s determined to continue the strategy it has defined under President Sarkozy’s authority: it will guarantee respect for the path we’ve taken for our public finances, with a return [of the public deficit] to under 3% [of GDP] in 2013 and a return to equilibrium in 2016.

This deficit target – as I’ve had the opportunity to tell you several times – is inviolable, and the 2011 results also show that France respects her commitments. As you know, for 2011 we’ll have a deficit result that will be markedly lower than the forecasts, which were of 5.7%. So the budgetary measures we’ve taken are sufficient at this stage. When we have a clearer vision of our growth, we’ll be able to make adjustments. I’ve already said that we have precautionary margins in the 2012 budget; we’ll make adjustments if necessary, but will take into account the growth recorded.

Let me add that our medium- and long-term financing has been carried out since the start of the year at rates which are markedly below those provided for in the 2012 budget and also markedly below those at which we borrowed a few years ago. For example, French 10-year debt was on the market at a rate of 3.08% yesterday evening, but we’ve made provision in the 2012 budget for an average rate of 3.7%. So we’ve got room for manoeuvre in the event of our debt ratio increasing; I don’t see any significant costs for 2012 that would call our budgetary policy into question.

Without waiting for the observations by Standard and Poor’s, the government has embarked on a strategy of improving our competitiveness to support growth. Since the beginning of our five-year term of office, the reform of the R&D tax credit, the reform of the local business tax and the development of future investments have been steps towards this.

With Wednesday’s summit on the crisis, we’re going to begin a new phase of support for the French economy’s competitiveness and for growth – a new phase with training for job-seekers and discussion about competitiveness agreements in companies and about the reform of social welfare funding to reduce labour costs. And finally, as you know, President Sarkozy has invited representatives of local authority groupings to a debate in the coming days, to see how local authorities themselves should engage in this deficit reduction effort. (…)

Finally, Standard and Poor’s emphasizes – rightly – how urgent it is to introduce a governance for the Euro Area that protects it against crises like the one we’re currently experiencing. That’s precisely what was decided by the heads of state and government on 9 December; it’s up to us to apply those decisions without delay; this will require the signature of a Euro Area treaty early this year.

There you are, ladies and gentlemen: President Sarkozy and I have never hidden the gravity of the crisis from the French people. After the social summit, we’ll take strong decisions, strong decisions that will lead to structural reforms, in order to continue along the path of strengthening France’s competitiveness and growth.

I’m now ready to answer your questions.

Q. – François Baroin yesterday ruled out a third austerity plan. You say no new measures will be taken, but France will remain under observation over the next three months. So won’t we have to take a few measures despite everything?

THE PRIME MINISTER – As I’ve said, it’s not the rating agencies that will set our policy and our agenda. We’ve twice taken decisions to adjust our budgetary forecasts; we’re in line with those forecasts with regard to the implementation of the 2011 budget. We think we can be in line with regard to the 2012 budget.

Secondly, I’d like to say that since the beginning of this crisis, President Sarkozy and I have constantly sought to strike a balance between the need to reduce deficits and the necessity of not destroying the weak growth that already characterizes the situation in the Euro Area. To seek to add major decisions on spending cuts today, in the economic situation we’re experiencing, would be to take a major risk with growth. We won’t take it. That’s why we’re concentrating our efforts on structural reforms to improve the French economy’s competitiveness. Reducing labour costs is a structural reform that must enable us to respond to investors’ concerns in the same way as with spending cuts, but more effectively for growth.

Q. – How do explain why the Fitch agency – which I believe belongs to a Frenchman who is one of your friends, Marc de Lacharrière – said it wouldn’t downgrade France’s rating? Was it at your request?

THE PRIME MINISTER – Listen, I really won’t make any comment on the agencies’ decisions. What I can see is that there are three agencies, one of which has estimated that France will retain her triple-A status throughout 2012, and one of which has taken the decisions you’re aware of – I remind you, for 16 European countries. Interestingly, it’s difficult to spot, in the commentaries for example, the fact that some countries with few debts or even no debts at all, like Luxembourg or the Netherlands, have been put on negative watch by the Standard and Poor’s agency. And there’s one agency, Moody’s, that has said it will take its decision in the coming weeks. We’re looking at those decisions; I said just now it was an indicator, but I’m wary of passing judgment on the rating agencies. And in any case, I repeat once again: they’re not the ones deciding our country’s policy.

Q. – In retrospect, don’t you regret having slightly dramatized the maintenance of the triple-A rating, because people in your camp were saying it was the national treasure and absolutely had to be preserved? Today you’re saying, “it’s not all that serious after all”.

THE PRIME MINISTER – I’m not saying it’s not all that serious: I have no regrets at all. (…) It’s obviously not good news, and it’s not good news for the Euro Area as a whole, but at the same time it’s a decision that is consistent with the perception a number of investors have of the situation in the Euro Area. And I’d like everyone to read Standard and Poor’s decision carefully, because it shows how central the question of the Euro Area’s governance, the Euro Area’s credibility, is. And everyone knows how much effort France – and especially President Sarkozy – has put in for months and months, to sound the alarm about the credibility of Euro Area governance, establish an economic government and set up barriers to protect the Euro Area’s weakest countries. From this viewpoint, to say that the situation is serious, that the European crisis is a serious crisis, is simply the truth, and I don’t regret – and we don’t regret – telling that truth.

Q. – Could you rule out, or try to rule out a downward revision of growth by the end of the first quarter?

THE PRIME MINISTER – No, I didn’t say that: I said we’d look at the growth figures recorded in the last quarter of 2011 and the first quarter of 2012 – as we did in 2011 [for the corresponding quarters] – in order to make the necessary adjustments. There are no objective reasons today enabling us to revise growth. When we know the figures for the last quarter of 2011, we’ll make the necessary adjustments. And as I said, there’s a precautionary reserve in the 2012 budget; of course we’ll have to turn this precautionary reserve into a cancellation of spending, which is a job the ministries are in the process of doing. And taking into account the growth figures recorded, we’ll proceed to adjustments throughout 2012 if necessary.

Q. – Nicolas Sarkozy is quoted as having said: “If I lose the triple-A rating, I’m dead.” So is he dead?

THE PRIME MINISTER – I’ve never heard President Sarkozy say that. (…) I think the seriousness of the crisis – which, moreover, I haven’t stopped warning about since the start of the five-year term – demands that structural reforms be introduced to support competitiveness. (…)

I’ve surprised people several times by saying we must be inspired by the economic policy that’s been conducted in Germany, because Germany is our partner and we must be as close as possible to the German economy’s performance. I see that the decisions just taken only confirm my view that while Germany has been taking important decisions for more than 10 years, we ourselves have been slow to do so. We’ve embarked on these decisions since the beginning of Nicolas Sarkozy’s five-year term. (…) We must simply go faster. And I want to insist on one point: there’s no delay, and the prospect of the presidential election can in no way be an excuse for not acting and not reforming.

Q. – According to Standard and Poor’s, Germany and France are no longer at the same level. Is this going to change the relationship between France and Germany? And, second question: are you going to push – with regard to Germany – for more growth measures and slightly fewer austerity measures?

THE PRIME MINISTER – Firstly, I don’t believe this decision will change anything about France and Germany’s relationship – first of all because it’s a long-term relationship. It reflects our geography, our economies and our history. Because France and Germany’s fates are completely bound up, Germany knows very well that there can’t be lasting prosperity there without a Euro Area which is experiencing growth, one which is strong and stable. And so there’s no reason for our relations to change.

Secondly, we champion, we support the efforts, [which] incidentally we made together, towards more budgetary discipline within the Euro Area countries. We also proposed – and this was adopted by the European Council – that every country introduce a golden rule which would enshrine in the constitution the target of having a balanced budget. We also want growth measures, but these must be taken – and France has made many proposals to this effect over the past few months – by the European Union, within the European Union. There are many issues on the table: [European] patents, support for innovation in small businesses and the allocation of the European structural funds. France has made proposals and I think we’re very much in line with Germany on them.

Q. – Standard and Poor’s criticized the fiscal pact adopted by the Europeans on 9 December, saying that it was only a partial response. Does this mean new initiatives have to be taken? And we’re also seeing that this decision is going to have an impact, among other things, on one of the firewalls, the European Financial Stability Facility. So does this mean that, once again, new decisions have to be taken and another last-chance summit has to be convened?

THE PRIME MINISTER – No, I think the decisions have now got to be implemented. We took some very strong decisions, with a very short timeframe to implement them. It was decided, among other things, to bring forward to this July the implementation of what we’re calling – to keep things simple – the European Monetary Fund. The European Monetary Fund will be provided with its own capital, so it will have real credibility, real solidity vis-à-vis the markets. It has to be up and running in July. I don’t believe we need to be chasing after new, ever more spectacular decisions, when we haven’t even implemented the decisions which were taken. As for the European fund’s credibility, I’d like to point out that the European fund will enjoy the same credibility as our country. And today our country is borrowing at around 3%. I’d like to point out that around 2002, France was borrowing at 5%. So we also have to put into perspective this threat of the rising cost of credit, which for the moment remains at historically low levels in the Euro Area. There you are, thank you./.

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