France cautions Germany not to push Europe too far on austerity
France's Manuel Valls also warned David Cameron that Europe is "not ready for an upheaval of its institutions", offering no concessions on EU treaty terms
By Ambrose Evans-Pritchard, International Business Editor
8:30PM BST 06 Oct 2014
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France's boyish prime minister, older than he looks, is losing his patience with EU austerity demands Photo: AFP
France has denounced the eurozone’s austerity regime as deeply misguided and issued a blunt warning to Germany and the EU institutions that demands for further belt-tightening may set off a political backlash, endangering European stability.
France has denounced the eurozone’s austerity regime as deeply misguided and issued a blunt warning to Germany and the EU institutions that demands for further belt-tightening may set off a political backlash, endangering European stability.
“Be careful how you talk to the countries in the South, and be careful how you to talk to France,” said the French premier, Manuel Valls. “The adjustment has been brutal and it has turned millions people against Europe. It is putting the European project itself at risk.”
Mr Valls said Europe’s fiscal rules have been overtaken by deflationary forces and a protracted slump. “You cannot enforce the Treaty rigidly in these circumstances. The austerity policies are becoming absurd, and we have to examine the situation,” he told journalists in London.
The reformist French premier said the eurozone’s failure to recover risked leaving the region on the margins of the world economy, stuck in a Japanese-style trap. France had pushed through €30bn of fiscal cuts from 2010 to 2012, and another €30bn since then in an effort to comply with EU deficit rules, only to see the gains overwhelmed by the economic downturn.
The deficit will remain stuck at 4.3pc of GDP in 2015. A further €50bn of cuts are coming over the next three years. “If they make us reach a 3pc deficit, the country will be totally on its knees. It’s not possible,” he said.
The deficit will remain stuck at 4.3pc of GDP in 2015. A further €50bn of cuts are coming over the next three years. “If they make us reach a 3pc deficit, the country will be totally on its knees. It’s not possible,” he said.
The warnings came amid reports the European Commission may strike down France’s draft budget for 2015, refusing to give Paris two extra years until 2017 to meet the 3pc limit. Brussels is also threatening “infringement proceedings”, a process that could ultimately lead to fines.
This would put the new Juncker Commission on a dangerous collision course with both France and Italy, two of the eurozone’s big three, now closely aligned in a joint push for EMU-wide reflation and New Deal policies.
Mr Valls said France and Britain were defending Europe’s “civilizational mission and values”, together bearing the costs of military intervention in Africa and the Middle East, and this should be taken into account when judging budget breaches. “We are acting for the rest of Europe. Our military costs are more than we thought for Libya, Iraq and the Sahel,” he said.
Despite warm words for his British military allies, Mr Valls played down hopes that France might give ground on Treaty concessions for the UK before any referendum on EU membership. “We will listen to David Cameron but I don’t think Europe is ready for an upheaval of its institutions. It is dangerous to open the Treaties,” he said.
Mr Valls was in London to promote his pro-business agenda to City bankers, and to combat what he called “deplorable French-bashing”, reacting acidly to comments by Andy Street, managing director of John Lewis, who derided France as “sclerotic, hopeless and downbeat” after visiting Paris. “He must have drunk too much beer,” said Mr Valls.
France’s 75pc tax rate for the rich will be swept away by the end of the year, ending a public relations disaster that brought in little revenue, if any. France will no longer turn to more taxes to plug its deficits. “We have to cut public spending,” he said.
British opinion has been slow to grasp the radical shift in policy since President François Hollande’s volte-face earlier late last year, starting with a concordat with French business leaders, and culminating in the choice of Mr Valls to lead his Socialist government. The Valls team has burned its bridges with erstwhile supporters on the party Left. Key figures have been purged or have resigned in protest. The Socialist old guard is up in arms over the new economy minister, Emmanuel Macron, a former Rothschild banker.
It is far from clear whether Mr Valls can push his far-reaching measures through the French parliament, though he won a vote of confidence last month. His party campaigned for the status quo in 2012 and lacks a clear mandate for radical action.
“When we came to power, we made a strategic error. We didn’t tell the French people what the condition of the country really was: the level of the deficit, the debt and the trade balance,” he said.
“The welfare state and everything the Left stands for has been blown up by the shock of globalisation, which was much greater than people realised. When we were beaten, we fell back on our Old Left ideology. We spent 10 years failing to prepare, and now we have to push through our ideological revolution while in government, which is much more difficult,” he said.
Mr Valls plays down any suggestion that he is pursuing an Anglo-Saxon market agenda. “We will not get rid of the 35-hour working week. We are not a Thatcherite government,” he said. Yet his aim is to slash the size of the French state from 56pc of GDP to average European levels, a drastic overhaul of the French model.
Some have compared him with Germany’s Gerhard Schröder, who pushed through the Hartz IV reforms early in the last decade. These put a lid on wages and helped Germany regain export market share. But there is a big difference. Germany was able to do this during a global boom. All of southern Europe was losing relative competitiveness through high inflation at the time. Several economies were overheating.
The rub is that reforms are usually contractionary in the short-run. Mr Schröder has since admitted that he could not have won political backing for his bitter medicine without breaching EU deficit rules, allowing fiscal stabilisers to cushion the blow. France is trying to do it at a time of austerity, with half of Euroland in or near recession, and against powerful deflationary forces. “The situation is very different,” said Mr Valls.
As sweet revenge, France will have the upper hand again in Europe’s affairs soon enough. It has a high birth rate, while Germany is on the cusp of an ageing crisis and slow decline. “In 15 years' time, France will probably be ahead of Germany. We will be first,” said Mr Valls.
This would put the new Juncker Commission on a dangerous collision course with both France and Italy, two of the eurozone’s big three, now closely aligned in a joint push for EMU-wide reflation and New Deal policies.
Mr Valls said France and Britain were defending Europe’s “civilizational mission and values”, together bearing the costs of military intervention in Africa and the Middle East, and this should be taken into account when judging budget breaches. “We are acting for the rest of Europe. Our military costs are more than we thought for Libya, Iraq and the Sahel,” he said.
Despite warm words for his British military allies, Mr Valls played down hopes that France might give ground on Treaty concessions for the UK before any referendum on EU membership. “We will listen to David Cameron but I don’t think Europe is ready for an upheaval of its institutions. It is dangerous to open the Treaties,” he said.
Mr Valls was in London to promote his pro-business agenda to City bankers, and to combat what he called “deplorable French-bashing”, reacting acidly to comments by Andy Street, managing director of John Lewis, who derided France as “sclerotic, hopeless and downbeat” after visiting Paris. “He must have drunk too much beer,” said Mr Valls.
France’s 75pc tax rate for the rich will be swept away by the end of the year, ending a public relations disaster that brought in little revenue, if any. France will no longer turn to more taxes to plug its deficits. “We have to cut public spending,” he said.
British opinion has been slow to grasp the radical shift in policy since President François Hollande’s volte-face earlier late last year, starting with a concordat with French business leaders, and culminating in the choice of Mr Valls to lead his Socialist government. The Valls team has burned its bridges with erstwhile supporters on the party Left. Key figures have been purged or have resigned in protest. The Socialist old guard is up in arms over the new economy minister, Emmanuel Macron, a former Rothschild banker.
It is far from clear whether Mr Valls can push his far-reaching measures through the French parliament, though he won a vote of confidence last month. His party campaigned for the status quo in 2012 and lacks a clear mandate for radical action.
“When we came to power, we made a strategic error. We didn’t tell the French people what the condition of the country really was: the level of the deficit, the debt and the trade balance,” he said.
“The welfare state and everything the Left stands for has been blown up by the shock of globalisation, which was much greater than people realised. When we were beaten, we fell back on our Old Left ideology. We spent 10 years failing to prepare, and now we have to push through our ideological revolution while in government, which is much more difficult,” he said.
Mr Valls plays down any suggestion that he is pursuing an Anglo-Saxon market agenda. “We will not get rid of the 35-hour working week. We are not a Thatcherite government,” he said. Yet his aim is to slash the size of the French state from 56pc of GDP to average European levels, a drastic overhaul of the French model.
Some have compared him with Germany’s Gerhard Schröder, who pushed through the Hartz IV reforms early in the last decade. These put a lid on wages and helped Germany regain export market share. But there is a big difference. Germany was able to do this during a global boom. All of southern Europe was losing relative competitiveness through high inflation at the time. Several economies were overheating.
The rub is that reforms are usually contractionary in the short-run. Mr Schröder has since admitted that he could not have won political backing for his bitter medicine without breaching EU deficit rules, allowing fiscal stabilisers to cushion the blow. France is trying to do it at a time of austerity, with half of Euroland in or near recession, and against powerful deflationary forces. “The situation is very different,” said Mr Valls.
As sweet revenge, France will have the upper hand again in Europe’s affairs soon enough. It has a high birth rate, while Germany is on the cusp of an ageing crisis and slow decline. “In 15 years' time, France will probably be ahead of Germany. We will be first,” said Mr Valls.
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