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ECONOMY

French economic recovery programme risks being overtaken by new lockdown

A plan announced with fanfare two months ago to support the French economy's recovery from the coronavirus pandemic has yet to be finalised but is already at risk of being overtaken by events as the government has imposed a second lockdown.

French economic recovery programme risks being overtaken by new lockdown
French President Emmanuel Macron chairs a video conference with foreign company executives on November 6, 2020, as part of a "mini choose France" forum, designed designed to attract more foreign busin

“This 'Relaunch France' strategy … is not a strategy to confront the difficulties of the moment, that we have already done and we'll continue to do…, no it is to prepare France for 2030,” President Emmanuel Macron said shortly before the government unveiled the programme at the start of September.

Yet the government said the programme's 100 billion euros in spending over two years, with one-third consecrated to supporting shifting the economy onto a sustainable environmental basis, aims to return the French economy to its pre-pandemic level by 2022.

But that goal is now under threat with a second wave of coronavirus cases having pushed the government to adopt a new lockdown.

While the restrictions are less severe than during the original March-May lockdown, it will still disrupt huge sections of the economy as businesses that welcome the public such as restaurants, gyms, theatres and cinemas, shut their doors.

READ MORE: What closes and what stays open during France's second Covid-19 lockdown?

'Time lag'

“There was a time lag between the announcement of the recovery plan, which was elaborated based on a scenario of only one wave of the epidemic, and today we need to go into a lockdown again with the resulting economic consequences,” said Anne-Laure Delatte, an economist at France's CNRS national scientific research centre.

According to an analysis published by the Institut Montaigne think tank on Friday, just over a fifth of the 100 billion euros will provide short-term support to the economy. Half of the money will only have an effect over the medium or long term. The rest will likely have a mixed effect.

The government's plan was also based on the expectation of a strong rebound in the economy. It has forecast 8 percent growth in 2021 following an 11 percent drop this year.

But that rebound is likely to be less pronounced as it will take longer, which even the government acknowledges.

“We'll have to re-evaluate these figures in light of the duration of the confinement,” Economy Minister Bruno Le Maire said Wednesday.

Demonstrators from various economic sectors gather to protest against the closing of 'non-essential' business in Toulouse, southern France on November 6, 2020, during the national lockdown aimed at containing the spread of Covid-19. Lionel BONAVENTURE / AFP

The European Commission and IMF have already lowered their forecasts for France next year, seeing respectively 5.8 percent and 6 percent growth.

“We're in a situation of extreme uncertainty: we're beginning to realise this isn't the final wave and then you have to add in the international context with Brexit and to a lesser extent the US election,” said Delatte.

Depending on the health situation at the end of the lockdown “either there'll be a dynamic rebound, probably similar to what we saw in the third quarter, or households and businesses will anticipate another lockdown and some will undoubtedly adopt a wait-and-see attitude,” said Xavier Ragot, head of the independent French Economic Observatory.

With consumer spending and business investment two critical elements of the economy, a wait-and-see attitude would hobble a rebound. A recovery programme, in addition to directly stimulating the economy, should also give consumers and businesses confidence to spend.

A customer pushes a trolley past the closed toy department of a supermarket in Bordeaux on November 4, 2020, on the sixth day of a lockdown aimed at containing the spread of Covid-19. Supermarkets banned on November 4, 2020 the sale of “non-essential products.” Philippe LOPEZ / AFP

'Late and poorly calibrated'

After weathering the first lockdown many companies find themselves in a weaker position, often with more debt.

The French Senate's finance committee has called on the government to adjust the recovery plan. Its spokesman, Senator Jean-François Husson called it “late and poorly calibrated”, saying he believed the government “should now favour temporary measures to support the economy”.

Several economists have called for support to help companies to avoid cash crunches and stave off a possible wave of bankruptcies. The plan only includes 3 billion euros of this type of support.

“This is essential as once you have one company which goes bankrupt, in reality you'll have a cascade because the suppliers and clients will themselves be put in difficulty,” said the CNRS's Delatte.

Companies will also likely need to make greater use of the temporary furlough programme under which the government picks up a majority of the salaries of employees which are idled due to confinement restrictions or a drop in activity, said the French Economic Observatory's Ragot.

Meanwhile, the Institut Montaigne said households with modest incomes would likely need more support as crises accentuate inequality.

The government does not exclude the idea of reinforcing short term measures such helping companies meet their rent.

The economy minister said other measures can be introduced into the draft of the 2021 budget, even if he defended the government's current strategy.

READ MORE: What are the rules of France's second coronavirus lockdown?

 

 

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ECONOMY

France and Italy face spending rebuke from EU

The European Union was expected to issue warnings to France, Italy and several other governments over excessive spending after new budget rules came into force this year.

France and Italy face spending rebuke from EU

The rebuke comes at a particularly difficult moment for France, where both the far left and far right are piling up spending promises ahead of snap polls triggered by President Emmanuel Macron’s crushing EU election defeat.

This will be the first time Brussels has reprimanded nations since the EU suspended the rules because of the 2020 Covid pandemic and the energy crisis triggered by Russia’s invasion of Ukraine, as states propped up businesses and households with public money.

The EU spent two years during the suspension overhauling budget rules to make them more workable and give greater leeway for investment in critical areas, like defence.

But two sacred goals remain: a state’s debt must not go higher than 60 percent of national output, with a public deficit – the shortfall between government revenue and spending – of no more than three percent.

The European Commission will publish assessments of the 27 EU states’ budgets and economies on Wednesday, and is expected to point out that some 10 countries including Belgium, France and Italy, have deficits higher than three percent.

The EU’s executive arm has threatened to launch excessive deficit procedures, which kickstart a process forcing a debt-overloaded country to negotiate a plan with Brussels to get back on track.

Such a move would need approval by EU finance ministers in July.

Countries failing to remedy the situation can in theory be hit with fines of 0.1 percent of gross domestic product (GDP) a year, until action is taken to address the violation.

In practice, though, the commission has never gone as far as levying fines, fearing it could trigger unintended political consequences and hurt a state’s economy.

The EU countries with the highest deficit-to-GDP ratios last year were Italy (7.4 percent), Hungary (6.7 percent), Romania (6.6 percent), France (5.5 percent) and Poland (5.1 percent).

They may face the excessive deficit procedures, alongside Slovakia, Malta and Belgium, which also have deficits above three percent, according to Andreas Eisl, expert at the Jacques Delors Institute.

The picture is complicated for three other countries, Eisl said. Spain and the Czech Republic exceeded the three percent limit in 2023 but should be back in line this year.

Meanwhile, Estonia’s deficit-to-GDP ratio is above three percent – but its debt is around 20 percent of GDP, significantly below the 60 percent limit.

The commission will look at the states’ data in 2023 but “will also take into account the developments expected for 2024 and beyond”, the expert told AFP.

Member states must send their multi-annual spending plans by October for the EU to scrutinise and the commission will then publish its recommendations in November.

Under the new rules, countries with an excessive deficit must reduce it by 0.5 points each year, which would require a massive undertaking at a moment when states need to pour money into the green and digital transition, as well as defence.

Adopted in 1997 ahead of the arrival of the single currency in 1999, the rules known as the Stability and Growth Pact seek to prevent lax budgetary policies, a concern of Germany, by setting the strict goal of balanced accounts.

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