The IMF has warned France that it needs more cuts to save its AAA credit rating. With a second bail-out failing to raise Greece’s rating from “junk”, even the healthiest EU economies might collapse under the burden, says analyst Thomas Thygesen.
The International Monetary Fund has declared that unless Paris tightens its belt, France will miss its three per cent budget deficit targeted for 2013. Three per cent is the level required by the eurozone’s Stability and Growth Pact. In 2010 France’s President Nicolas Sarkozy pledged he would reduce the country’s deficit of 7.1 per cent to the required three per cent in 2013.
The IMF has estimated that by the end of 2013 France’s deficit is not likely to drop lower than 3.8 percent. The fund says that Paris’s only option is for the government to reduce its spending to meet its fiscal targets, particularly in areas such as pensions and healthcare.
On Wednesday the budget minister, Valerie Pecresse, said the target was “sacrosanct.” According to Pecresse, the government is ready to make further reductions in tax exemptions to achieve its fiscal goals.
If France follows the downgraded route of other EU countries, it will be “the end of the line for the European bail-out experiment,” believes Thomas Thygesen, from SEB Merchant Banking.
“France is not bankrupt fundamentally in any way that is similar to Greece, but if markets decide to cut them[selves] off from France, then even healthy governments can go bust,” Thygesen told RT.
Moreover, the analyst does not believe that tightening the belt is the right way for France, which is the eurozone’s second-largest economy.
“Those debt problems that have been pointed out by the IMF could be potentially resolved over a period of five or ten years,” he added. “You do not want to go on weakening the economy and add more downside risks right now. But obviously if markets decide this is what they want in order to keep funding the French government, then we might come into a situation where sacrifices are necessary.”
Meanwhile, in Germany the finance minister, Wolfgang Schaeuble, is not happy at one of the key points in the Greek rescue decided by EU leaders last week. Schaeuble says the European Financial Stability Facility did not agree to issue blank cheques for buying Greek bonds.
Schaeuble added that the bailing out of Greece, which in total cost some 159 billion euros, should be regarded as a unique case.
“In future such purchases must only take place under very tight conditions, when the European Central Bank establishes that there are extraordinary circumstances in financial markets and dangers to financial stability,” he said.
According to economics author Patrick Young, now when the economic illness is spreading to the whole body of Europe, some amputations should be made.
“We have got a situation at the moment when provincial libraries in northern Germany are being closed because the money is not there, because it is being used to fund people in the Mediterranean,” he said. “I think German voters are going to get very angry about that very very soon and I actually think the political will is not there amongst the people to endlessly keep bailing out their southern neighbors.”