by France is entering an era of belt-tightening, as wars in Ukraine and Gaza, economic slowdowns in Germany and China and record interest rates take a bigger-than-expected toll on growth.
The French will face cuts of 10 billion euros ($10.8 billion) in public spending, including environmental subsidies and education, the government announced Thursday, on top of the 16 billion euros in cuts announced a few months ago. . Finance Minister Bruno Le Maire on Monday revised the economic growth forecast for this year to 1 percent, down from 1.4 percent at the end of last year.
“Lower growth means lower tax revenue, so the government must spend less,” Le Maire said at a news conference.
After spending lavishly during the pandemic to support the economy and protect consumers from high energy prices, France now risks violating European Union budget rules that restrict public borrowing. To avoid that, the government must cut costs to reduce the deficit to 4.4 percent of gross domestic product this year, from 4.8 percent.
Paris is increasingly concerned about the downgrading of French debt by international rating agencies, a move that would increase borrowing costs.
The French slowdown reflects the tepid recovery across Europe, which has failed to recover as quickly as the United States, where the economy, while slowing due to breakneck growth, remains driven by consumer spending.
Economic growth has stagnated in the 20 countries that use the euro: no growth in the last three months of 2023 compared to the previous quarter, narrowly avoiding a recession after a contraction in the third quarter. For the year, the eurozone grew just 0.1 percent.
“The real problem is the growth gap between Europe and the American continent,” Le Maire said. “That’s the elephant in the room.”
Budget cuts pose a new challenge for President Emmanuel Macron. Now, midway through his second term, he has attracted hundreds of billions in investment commitments from multinational companies in recent years. These include the creation of four huge electric car battery plants in northern France and a pharmaceutical industry bolstered by new investments from Pfizer and Novo Nordisk, which will expand production in France of its popular weight-loss drugs Ozempic and Wegovy.
But elsewhere the slowdown has been palpable. Unemployment, which fell last year to a 15-year low of 7 percent, has risen again as manufacturers reduce production and exports slow. Consumers, fearful of high inflation, have also cut back on spending, a key driver of growth.
At the same time, Macron is trying to counter the rise of Marine Le Pen’s far-right National Rally party, which has taken advantage of the economic slowdown, immigration problems and regulatory requirements imposed by the European Union to attract disenchanted voters.
Last month, Macron restarted his government and named a new prime minister, his 34-year-old protégé, Gabriel Attal, who called for a civic and economic “rearmament” of France. Macron also pledged more pro-business measures and pledged to reduce France’s debt.
Le Maire said Europe’s anemic production was especially worrying because structural issues, including environmental, labor and other regulatory standards, made it more difficult to close the competitive gap with the United States.
Europe’s recovery has also been slowed by a prolonged energy crisis that dealt a blow to industry-dependent Germany, Europe’s largest economy and France’s largest European trading partner.
And European governments are frustrated by President Biden’s Inflation Reduction Act, which some see as a protectionist industrial policy that threatens their economies. The European Union has been pursuing its own clean energy subsidies in response to U.S. incentives.
The highest interest rates in the history of the European Central Bank have not helped. Inflation has begun to cool, but high borrowing costs continue to slow business activity and hurt the housing market in parts of Europe, including France, where house prices fell last year as a pullback in bank lending Home buying slowed down.
Sales of existing homes in France fell 20 percent in the 12 months to October, compared with a year earlier, while sales of new homes fell almost 40 percent, according to government data.
“The economic slowdown is the price we have to pay for our victory over inflation,” Le Maire said.
Budget cuts in France, enacted by government decree on Thursday, will reduce spending on key government agencies, including education, justice and defense. A considerable part, around €2 billion, will come from a program to help households and businesses meet the EU’s strict environmental standards.
The cuts were deemed necessary after the government shelled out a series of unexpected expenses this year to deal with several crises, including 400 million euros to help angry farmers who had threatened to blockade Paris over rising costs, cheap imports and EU paperwork, as well as paying police officers more money ahead of this summer’s Olympic Games in the French capital. The government has also promised an additional €3 billion in aid to Ukraine.
