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France abandons pledge to balance budget by 2012

Latest update : 2008-09-27

The French government unveiled a gloomy annual budget on Friday, abandoning a promise to wipe out public deficit by 2012. Against a backdrop of global financial crisis, it revealed that the economy shrank by 0.3 percent in the second quarter of 2008.

France abandoned Friday a promise to wipe out its public deficit by 2012, as the global financial crisis sapped growth, hit the job market and forced the government to unveil a gloomy annual budget.
   
The deficit forecasts were published along with a raft of bad economic news, which revealed that the economy had shrunk by 0.3 percent in the second quarter of 2008 and that annual growth would lie between one and 1.5 percent.
   
France began 2008 hoping for a growth rate of 2.25 percent.
   
As a member of the 15-nation eurozone single-currency bloc, France had given an engagement to reduce its public deficit -- the shortfall on the central budget plus social security and local government spending -- to zero by 2012.
   
Instead, the budget presented to parliament warned that the deficit would remain unchanged at 2.7 percent of Gross Domestic Product (GDP) for this year and the next, and then fall gradually to 0.5 percent by 2012.
   
Eurozone member states have to give assurances to keep their deficits under control in order to maintain the stability of the single currency and France could theoretically face sanctions if the shortfall is not made up.
   
The French budget deficit -- the gap between central government revenue and spending -- will continue to rise, hitting 52.1 billion euros (76 billion dollars) next year compared to 49.4 billion euros in 2008.
   
The 2009 budget was drawn up on the basis that inflation would fall from 2.8 percent in 2008 to 2.0 percent next year, that oil will trade at 100 dollars per barrel and the euro be worth 1.45 dollars, according to the text.
   
Separately, Employment Secretary Laurent Wauquiez released an estimate that August had seen between 30,000 to 40,000 new job seekers register with France's state unemployment agency, the worst monthly spike since 1993.
   
France's disheartening news came against the background of continuing turmoil in world markets, following the banking crisis sparked by the collapse in mortgage lending and the failure of major US and British banks.
   
On Thursday, President Nicolas Sarkozy -- who came to power last year promising to put more money in voters' pockets -- warned the French that they would not be spared by the global storm and predicted hard times ahead.
   
In a major speech, Sarkozy warned: "To tell the French people the truth, is to tell them the current crisis will have consequences in the coming months for growth, for unemployment, for purchasing power.
   
"The crisis is not over, it will have lasting consquences. France is too involved in the world economy for us to think for one second it could be sheltered from the events currently rocking the world."
   
Sarkozy promised to underwrite French savings accounts in the event any more banks come under pressure and promised populist measures to limit the salaries and "golden parachute" pay-offs paid to financial executives.
   
The French government statistics agency, INSEE, blamed the second quarter contraction on falling exports.
   
France's economy is heavily dependent on high-tech and luxury agriculture exports which have been hit by the relative strength of the euro over the dollar, high fuel prices and the global economic slowdown.
   
The negative outcome is the first contraction in the eurozone's second largest economy since the fourth quarter of 2002.
   
Despite the tight situation, the budget included a large increase of 5.4 percent in defence spending, bringing the total to 32 billion euros at a time when French troops are in combat in Afghanistan and off the coast of Somalia.
   
The French stock market was down steeply Friday morning, with the CAC 40 index off by 1.58 percent as traders nervously followed events in the United States where lawmakers were wrangling over a bank rescue package.

Date created : 2008-09-26

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