France Will Cut Spending as It Sees a Weaker Economy Ahead

France Will Cut Spending as It Sees a Weaker Economy Ahead

France is entering an era of belt-tightening, as the wars in Ukraine and Gaza, economic slowdowns in Germany and China and record-high interest rates take a bigger-than-expected toll on growth.

The French will find themselves faced with cuts of 10 billion euros ($10.8 billion) in government spending, on items including environmental subsidies and education, the government announced Thursday, on top of €16 billion in cuts announced a few months ago. The finance minister, Bruno Le Maire, on Monday revised the forecast for economic growth this year to 1 percent, down from 1.4 percent at the end of last year.

“Lower growth means lower tax receipts, so the government must spend less,” Mr. Le Maire said at a news briefing.

After spending lavishly during the pandemic to support the economy and shield consumers from high energy prices, France is now at risk of breaching European Union budget rules that restrict government borrowing. To avoid that, the government must cut costs to lower the deficit to 4.4 percent of gross domestic product this year, from 4.8 percent

Paris is increasingly concerned about French debt’s being downgraded by international rating agencies, a move that would increase borrowing costs.

The French slowdown mirrors the tepid recovery across Europe, which has failed to bounce back as quickly as the United States, where the economy, although slowing from breakneck growth, continues to be powered by consumer spending.

Economic growth has flatlined in the 20 countries that use the euro: no growth in the last three months of 2023 versus 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 issue is the growth gap between Europe and the American continent,” Mr. Le Maire said. “That is the elephant in the room.”

The budget cutbacks pose a fresh challenge for President Emmanuel Macron. Now in the middle of his second term, he has attracted hundreds of billions in investment commitments from multinational companies in recent years. These include the creation of four massive battery plants for electric cars in northern France and a beefed-up pharmaceutical industry with new investments from Pfizer as well as Novo Nordisk, which will expand production in France of its popular Ozempic and Wegovy weight-loss drugs.

But elsewhere, a slowdown has been palpable. Unemployment, which fell last year to a 15-year low of 7 percent, has ticked back up as manufacturers curb production and exports slow. Consumers, wary of high inflation, have also cut spending, a key driver of growth.

At the same time, Mr. Macron is trying to counter the rise of Marine Le Pen’s far-right National Rally party, which has seized on the economic slowdown, immigration issues and regulatory requirements imposed by the European Union to attract disenchanted voters.

Last month, Mr. Macron rebooted his government, appointing a new prime minister, his 34-year-old protégé, Gabriel Attal, who called for a civic and economic “rearmament” of France. Mr. Macron also pledged more pro-business measures and vowed to reduce France’s debt.

Mr. Le Maire said Europe’s anemic output was especially troubling because structural issues, including environmental, labor and other regulatory standards, made it more difficult to narrow the competitive divide with the United States.

Europe’s rebound has also been held back by a lengthy energy crisis that dealt a heavy blow to industry-dependent Germany, Europe’s largest economy and France’s biggest European trading partner.

And European governments are frustrated by President Biden’s Inflation Reduction Act, which some view a protectionist industrial policy that threatens their economies. The European Union has been pursuing its own clean energy subsidies in response to the U.S. incentives.

The highest interest rates in the European Central Bank’s history have not helped. Inflation has started to cool, but lofty borrowing costs continue to curb business activity and dampen the real estate market in parts of Europe, including France, where housing prices slid last year as a pullback in bank lending slowed home buying.

Existing-home sales in France slumped 20 percent in the 12 months to October, compared with a year earlier, while new-home sales plunged nearly 40 percent, according to government data.

“The economic slowdown is the price we have to pay for our victory over inflation,” Mr. Le Maire said.

The budget cuts in France, enacted by government decree on Thursday, will pare spending at key government agencies, including education, justice and defense. A hefty chunk, around €2 billion, will come out of a program to help households and businesses meet tough E.U. 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 to help angry farmers who had threatened to blockade Paris over rising costs, cheap imports and E.U. paperwork, as well as to pay 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.

Liam Garrison

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