France is at a crossroads. It has numerous valuable assets, but it cannot postpone long-overdue reforms, or else it will become increasingly irrelevant in a fiercely competitive global economy. This is the economic challenge that President François Hollande, Prime Minister Jean-Marc Ayrault, and all of us in the French government must confront.
We face a historic responsibility: we need to modernize the French economy, and introduce in a few months a decade’s worth of reforms to generate stronger, more inclusive growth, create more jobs, and shrink public deficits. This is precisely what the government has been doing since the election last year; indeed, no French government has ever carried out so many reforms in such a short period of time.
France’s economic performance has been lackluster during the past ten years, particularly with respect to competitiveness, debt sustainability, public spending, and the labor market. Our responsibility is to ensure that we are doing better in each of these areas by 2017, when the current electoral term expires.
To meet this challenge, we have designed an economic strategy that rests on three pillars: Europe, fiscal consolidation, and competitiveness.
Europe is our number one priority: stabilizing the eurozone and resolving its current crisis are essential to stability and economic recovery in France.
Hollande’s government insists that we will be successful only if three conditions are met. First, Europe should adopt a balanced approach to fiscal consolidation – a necessary process, but self-defeating when carried out too quickly. We must then break the perverse feedback loop between banking risk and sovereign risk that is at the heart of the euro crisis. This requires implementing a fully-fledged banking union – with a pan-European supervisor and a strong regime for banking resolution and deposit insurance – as soon as possible. Finally, in the medium to long term, we must complete the eurozone integration process and move forward on solidarity and risk-sharing – for example, by establishing a eurozone-specific budget.
In late November, the eurozone finally agreed on a partial rescheduling of Greece’s debt to alleviate the country’s financial burden. It was a critical step toward stabilization, but more must be done. In 2013, we will have to turn our gaze to other countries (such as Cyprus and Spain), and ensure that we maintain the momentum needed to build a banking union.
Fiscal consolidation is the second pillar of France’s economic strategy. France has not adopted a balanced budget in the last 30 years, and its public debt reached an unsustainable €1.7 trillion ($2.2 trillion) in 2011. Our duty is to rise to the occasion and reverse the tide.
France is fully committed to a fiscal-consolidation effort that returns it to a balanced budget by 2017. This is not just a political commitment; we have enshrined France’s fiscal path in a law adopted in November.
The coming year will be a milestone on this path: France is targeting a 3%-of-GDP budget deficit in 2013, down from 5.2% in 2011 and 4.5% in 2012, and a lower debt/GDP ratio from 2014 onward. This is an ambitious commitment, and one that we intend to meet without resorting to an old-fashioned “tax and spend” fiscal policy: over the next five years, spending cuts will be larger than tax increases, reaching €60 billion over five years.
Obviously we will have to modernize France’s administration to achieve this, looking to other countries for best practices. But the challenge for the coming five years will be to adapt and upgrade our institutions without undermining the quality of public services, which is part and parcel of French competitiveness.
Finally, we have committed ourselves to measures aimed at addressing France’s weakened competitiveness, via a “National Pact for Growth, Competitiveness, and Employment,” which includes a €20 billion cut in labor costs for employers, to be phased in over three years. A new corporate-tax credit will cut payroll taxes by 6% for all wages below 2.5 times the minimum wage – a step that will benefit more than 80% of all salaried workers.
And, because expectations for France’s competitiveness agenda are high, we will ensure swift implementation of the National Pact so that it can start producing results as soon as 2013. We have designed the corporate-tax credit to maximize its positive impact on the economy: labor costs will fall immediately without depressing aggregate demand in 2013, because the spending cuts (€10 billion) and household tax increases that will fund the credit will begin only in 2014.
The Pact also improves the business environment and creates mechanisms, such as the extension of a research tax rebate, designed to boost innovation.
Last but not least, we have launched a major labor-market reform that will establish our own version of northern Europe’s “flexicurity” model. Firms need more flexibility to adjust their payrolls in adverse economic conditions; and workers need more security, provided by better training and active labor-market policies.
We are committed to reforming the French economy. But we are committed to doing so while remaining true to our political convictions, and without jeopardizing what makes France both strong and special: a highly redistributive social model. Europe is and will be part of the solution, if we can agree that more solidarity is the next step in our shared journey.
Europe needs more solidarity not only to overcome the crisis and complete the eurozone integration process, but also to bridge the widening divide between Europe and its peoples. I look forward to 2013 as a year of progress on our national and European agendas alike. They are, after all, two sides of the same coin.