Didier Migaud, a Socialist, comments on the audit conducted by the Cour des Comptes, which he heads. The report indicates that slowing growth has reduced anticipated revenues to the point where France needs to find an additional €33 billion euros in order to reach Hollande's self-imposed target of under 3% budget deficit by the end of 2013.
A combination of €33 billion in spending cuts and tax increases should not be impossible to achieve. It amounts to about 1.5% of GDP. The question is whether a decrease in the state deficit this rapid is warranted, or whether, as Paul Krugman and many others argue, it will only slow growth still further, probably tipping France into recession and deepening the state's fiscal hole. Absent some new source of aggregate demand, this downward spiral will almost surely be the result of rapid belt-tightening. Belief in "expansionary contraction" has been shown to be a pipe dream.
Is there any hope of a revival of demand to compensate for diminished government outlays? It's not likely to come from the private sector, which has increased its savings rate in order to rebuild its battered balance sheet. It's not likely to come from China, whose economy has been slowing. Exports to the US may increase somewhat, as the US economy continues its own excruciatingly slow recovery, and a continued fall of the euro might help here as well, but not much.
France's European trading partners won't be picking up the slack, as most of them are operating under imposed austerity regimes as well. Germans might of course buy more French goods if they wished, but French prices are unlikely to decline very much over the next two years. Germany may need to purchase more electricity from France as it closes some of its nuclear plants.
So Hollande is in a box. If he does what the Cour des Comptes says is necessary to meet his own goal, he will probably fail. If he doesn't, he will open himself up to the charge of reneging on his campaign promise, and the Right will lambaste him for irresponsible economic management.
The right thing to do, in my opinion, is to delay the budget reduction for a year, to announce forthrightly, while he still has the public's trust and mandate, that the goal cannot be met. So this is a test of both Hollande's grasp of the economic realities and his readiness to face slings and arrows in pursuit of the right policy.