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French economy – Italy/Euro Area

Published on November 21, 2011
Excerpts from the interview given by François Baroin, Minister for the Economy, Finance and Industry, to the “Les Echos” newspaper

Paris, November 16, 2011


Q. – A European think tank has said France’s rating is no longer justified. The “spread” with Germany has shattered a new record: don’t investors think the triple-A has already been lost?

THE MINISTER – France hasn’t lost her triple-A rating and she enjoys a stable outlook from all the agencies. Moody’s said it would look in the coming weeks at whether or not this outlook should be confirmed. We’re doing everything to demonstrate our very fast response to the extraordinary turmoil the Euro Area is going through. The 0.4% growth observed in the third quarter guarantees our targets will be met for increased activity and reducing the public deficit in 2011, and it strengthens the credibility of the 7 November plan. That plan relies on structural, fair reforms that will have a minimum impact on spending power, the key engine of our growth.

Q. – The European Commission is forecasting growth of only 0.6% in 2012 (1% according to Paris) and believes France will have to bring in more austerity. Are you still ruling out a new plan this winter?

THE MINISTER – We’re not working on a third plan. No government in history, in the run-up to a presidential election, has taken measures as courageous as the ones we’re going to get voted through. The Commission hadn’t incorporated the 7 November announcements into its deficit forecasts, and it’s welcomed the good direction taken by France.

Let me add that in the budget we’ve created the necessary room for manoeuvre to keep to our deficit target in 2012 in the event of a more marked slowdown in the economy, by holding back €6 billion in appropriations. Even with 0.5% growth, we could cope. (…)

Q. – Despite this plan, France today borrows at a rate twice as high as Germany’s.

THE MINISTER – At a little over 3.5%, France obtains financing under conditions that are still good. But we must do more than Germany to reduce our deficits, and that’s what we are doing. Germany is the benchmark in terms of interest rate levels, her bonds are a little more liquid than ours and she’s a haven in the Euro Area’s general climate of uncertainty. Investors are dubious about sovereign debt.

The key is to remove this doubt from the minds of the markets and prove our ability to reduce deficits while building the best possible monetary area, which is far from being the case today. And all this without undermining the recovery in growth.

Q. – Are we victims of the dictatorship of the markets?

THE MINISTER – Giving the markets a human face makes no sense: there’s no mastermind hidden behind a curtain! There are investors who wonder about our credibility, and we must provide them with answers. We’re at war against speculators and deregulated markets, but we don’t forget that markets finance the economy and states. (…)


Q. – We’re witnessing a frenzy of austerity in Europe. Haven’t we entered a vicious circle that leads straight to recession?

THE MINISTER – At the G20 summit in Cannes it was decided that countries with surpluses will contribute to the recovery, while countries that must consolidate their budgets will swiftly have to announce their corrective measures. We’re no longer thinking in terms of recovery on all fronts, as we were in London in April 2009.

Q. – What are you expecting of Italy?

THE MINISTER – We’ve noted the change in government; we’re expecting measures to make savings and reduce the debt in accordance with the proposed timetable. Everything that’s happened in the past fortnight is a step in the right direction. Italy has a powerful, solid economy but it’s the victim of mistrust.

Q. – Rates are increasing on Italy’s debt; she’ll need help from the European Financial Stability Facility or the ECB.

THE MINISTER – We’re in favour of intervention by all the European institutions, including the ECB, to provide the best responses to the crisis. The [European] Central Bank, which I remind you is independent, has made commitments to explain that it will answer the call in the event of difficulty. Germany, for historical reasons, has closed the door to direct involvement by the ECB.

Q. – “Including the ECB”. Do you mean Berlin is refusing to allow it to be a lender of last resort to the Euro Area countries, as the other central banks are?

THE MINISTER – It’s true the US Federal Reserve intervenes, which doesn’t raise any questions about its independence; the Bank of Japan and the Bank of England do it too. But Germany has a history, a memory of inflation, of over-indebtedness. Before the 27 October agreement, we championed the call for the European Financial Stability Facility (EFSF) to have bank status. If given a banking licence, the fund could draw on the ECB. But the ECB opposed this, and Germany wanted other options. That’s why we’re also working on other methods, namely the leverage effect and guarantees for state bonds. (…)

Q. – Today nobody believes any more in the new firepower of the European Financial Stability Facility. It lends at higher rates than those of France!

THE MINISTER – Wolfgang Schäuble and I pushed hard last week to speed up the Facility’s operational timetable. Its CEO, Klaus Regling, has a very clear road map. At the technical level, it’s a question, among other things, of the level at which you place the raising of credit: the more you increase it, the less significant the leverage effect. We must, at the very least, achieve the target of €1 trillion set in the 27 October agreement. The aim of the firewall is to avoid contagion. To that end, our strike capability must be enough of a deterrent to avoid contamination.

The new methods of intervention will be ready before mid-December.
The protection of the banks through recapitalization, the strengthening of the European Facility and the modernization of governance are our response to the crisis.

If the question is “are we moving towards more federalism?” the answer is “yes”, and as a Gaullist I’m not at all uneasy with the expression. There are lessons to be learnt from the crisis. We must move towards greater convergence, and probably modify the treaties.
President Sarkozy will have an opportunity to present the French contribution to this important debate./.

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