France's battered economy: François Hollande's cyclical troubles IT IS hard to detect any benefit for President François Hollande in the tax-avoidance scandal that cost him his budget minister in March. Jérôme Cahuzac, formerly responsible for curbing tax fraud, resigned after lying to parliament about a secret Swiss bank account, prompting a tough new transparency drive (see article). But at least one side-effect of the affair has been to distract attention from the troubling state of the economy. On April 16th the IMF issued a grim reminder by forecasting that France will join Spain, Italy, Greece and Portugal in recession in 2013. The Fund now predicts that France's GDP will fall by 0.1%. The worsening outlook leaves Mr Hollande's government not only unable to stick to its promises of deficit reduction, but facing an internal political rebellion over how to manage its public finances. Despite the IMF, Pierre Moscovici, the finance minister, is standing by his forecast of growth of 0.1% in 2013 and 1.2% in 2014. He confirmed this on April 17th in France's stability programme, which it will submit to the European Commission later this month. But the IMF is not the only organisation to be more pessimistic. In its first ruling, France's new High Authority for Public Finances, set up by Mr Hollande to monitor forecasting and the budget, stressed that official French forecasts were "systematically affected by an optimistic bias," and warned of a "risk" that growth forecasts for 2013 and 2014 needed downward revision again. The economy has been depressed by fiscal consolidation at home, which has squeezed domestic demand, the traditional motor of French growth, as well as by low confidence and weak exports. Household consumption fell in both January and February. In March the INSEE business-confidence index dropped to nearly ten points below its level of a year ago. Struggling with the lowest profit margins in the euro area, many firms are putting investment on hold. As the commission noted in its recent report on macro-imbalances, "a persistent deterioration of competitiveness" in France has led to a greater loss of world export share over the past ten years than in Germany, Italy or Spain, particularly in manufacturing. Scarcely a week goes by without another factory closure or a redundancy plan. This week a French court rejected both proposed buyers for the Petroplus oil refinery, in Normandy, prompting its imminent closure with the loss of 470 jobs. Despite government promises to the contrary, the same fate has befallen a car plant (Aulnay-sous-Bois) and a tyre factory (Amiens), each making headline news. A prime-time documentary on public television this week followed the workers" abortive struggle to save two Arcelor-Mittal blast furnaces at Florange, which Mr Hollande had promised on the campaign trail to rescue. Unemployment has hit a 14-year high. All this explains why the government is pleading with Brussels to let it off its promise to cut the deficit to 3% of GDP by the end of 2013. Mr Hollande said this week that "the solution to the crisis is not austerity." Having quietly and successfully courted Olli Rehn, the (Finnish) economics commissioner, on this point, Mr Moscovici hopes to convince the commission (and the Germans) that, after a serious effort to reduce the structural deficit this year, the headline number should be allowed to overshoot next. But Mr Rehn has said that, if France is to be given any slack, it must bring the deficit "well below" 3% in 2014. Mr Moscovici now promises to hit 3.7% this year and 2.9% in 2014. The trouble is that even these less ambitious targets will prove hard to reach. INSEE, the national statistics office, says that France missed its target of 4.5% last year, with the deficit ending up at 4.8%. Taxation in France has reached saturation point, and Mr Hollande has promised that there will be no new taxes in 2014 beyond another VAT increase. The Cour des Comptes, the national auditor, has deplored the fact that three-quarters of the structural effort to reduce the deficit this year depends on tax rises. The government now expects the overall tax burden, already the highest in the euro zone, to rise yet again, to some 46.5% of GDP next year. Mr Moscovici insists that most of next year's effort will come from spending cuts. He points to a forthcoming pension reform as well as to some streamlining of the bureaucracy to create what Mr Hollande calls a "shock of simplification." Jean-Marc Ayrault, the prime minister, says that family benefits will be cut for the richest 15% of French households. But no other specific savings have yet been spelt out. In a sign of how hard rationalisation can be, voters in Alsace recently rejected in a referendum a plan to merge their two departments and one region into a single body. Squaring the deficit circle would be hard enough were Mr Hollande a popular leader with a strong mandate for reform. In fact his poll numbers are at a record low, and during his election campaign he pandered to the anti-capitalist left and let voters believe that deficit reduction could be achieved mostly by taxing the rich and the "world of finance." Now a minority in his own government is dismayed by what they consider a conversion to austerity, a Socialist taboo. Arnaud Montebourg, the left-wing industry minister who once threatened to nationalise Arcelor-Mittal, recently criticised his own government's policy, arguing that "fiscal responsibility, if it kills growth, is not responsible." At a European level, Mr Montebourg has a point. In France, however, where public spending is now at 57% of GDP, a euro-zone record, and the public debt is expected to reach 94% of GDP next year, a serious attack on spending is urgently needed. Mr Hollande is caught in a semantic trap, promising "rigour" without "austerity" - a distinction that nobody understands. The risk is that if he embraces the European anti-austerity argument too overtly he may only strengthen resistance within his own party to even modest measures of fiscal consolidation.