New French cabinet tests German waters

  
Arnaud Montebourg, May 2012. [Reuters]

France's new Socialist government delivered mixed messages yesterday (7 April) to Germany, its closest partner and the European Union's pivotal power, on its priorities for reducing the budget deficit and stepping up economic reforms to boost growth.

Finance Minister Michel Sapin told his German counterpart, Wolfgang Schäuble, that Paris would stick to promised deficit reductions and that any measures to cut France's budget gap would come from savings and growth.

But his attempt to convey a clear, orthodox message was blurred when an outspoken leftist promoted to economy minister told French television that public finances were secondary to promoting growth and that Germany had shown understanding.

Sapin told a joint news conference with Schäuble that the new team in charge in Paris would take "tough, brave" decisions to overhaul a rigid economy.

"We all know the way out of the crisis will be first of all for us to stick to our commitments and secondly through higher economic growth," he said.

Sapin made his maiden visit to Berlin along with Economy Minister Arnaud Montebourg, a sharp critic of what he calls German-imposed austerity. Montebourg met separately with German Economy Minister Sigmar Gabriel shielded from media attention.

But Montebourg told BFM TV back home: "The question of public accounts is secondary to growth. Growth is what creates jobs. Public accounts don't create a single job, indeed they can destroy them. That's the message I delivered here to our German friends, who showed understanding."

The sharp difference of emphasis highlighted the balancing act that President François Hollande is attempting by appointing the pro-European centre-left Sapin to reassure EU partners and investors while using the firebrand eurosceptical Montebourg to win back angry left-wing voters.

Sapin made no mention of his call last week for negotiations on the "rhythm" of reducing the deficit, which stood at 4.3% of national output last year, to below the EU treaty limit of 3%. Paris has already been granted a two-year delay by the EU until the end of 2015 to meet that target.

Schäuble said France had confirmed that it knew its obligations and he voiced confidence in cooperation with Sapin.

Pressed on the pace of deficit reduction, Sapin declined to comment, saying new Prime Minister Manuel Valls would set out the government's policy in a keynote speech to parliament on Tuesday to be followed by a confidence vote on Wednesday.

Sapin also said he would discuss the issue with EU Economic and Monetary Affairs Commissioner Olli Rehn during the annual International Monetary Fund meeting in Washington next weekend.

"I believe this dialogue will lead to overcoming any difficulties there may be," Sapin said.

France is due to present a new medium-term budget plan to the European Commission in mid-April after being told last month it was off course. The EU executive will issue its country-specific policy recommendations in June after EU elections.

Austerity vs. growth

The balance between fiscal austerity and stimulating economic growth and consumption is turning into a central issue in the campaign for European Parliament elections next month.

Martin Schulz, the European Socialists' leading candidate for the post of European Commission president, cautiously endorsed France's plea for more time last week.

"If it is necessary, then yes, but first it has to be negotiated," he told France's BFM TV.

His conservative rival for the top job, Jean-Claude Juncker, hit back at the weekend, telling reporters: "It is a serious political error that Martin Schulz wants for the third consecutive year to allow France to exceed the 3% deficit limit. This goes against the Stability and Growth pact (EU budget rules), which I wrote as president of the Eurogroup."

Hollande, under pressure from voters and left-wing lawmakers to ease up on savings measures, indicated after a local election drubbing last week that Paris would seek another delay.

Nearly 100 back-bench Socialist lawmakers - almost one in three - signed an open letter to Valls at the weekend demanding a change in economic policy to improve workers' living standards and boost consumption.

Sapin said the government would carry out deep reforms to improve companies' profit margins and enable them to invest and create more jobs to bring down France's nearly 11 percent unemployment - more than double Germany's jobless rate.

Hollande has promised €50 billion in budget savings over the next three years and an additional €10 billion in cuts in employers' labour charges in what he calls a "Responsibility Pact" in return for job creation.

Valls is to give more detail on Tuesday about how those spending cuts will be achieved, including an expected two-year extension of a freeze on most civil service pay.

Schäuble expressed support for the French approach, telling reporters: "Germany needs a strong France and we already said after President Hollande announced the Responsibility Pact that we believe it's quite a good path and that we are confident France will continue to be successful and strong."

Paris has a long history of non-compliance with its EU deficit-cutting commitments. In 2003, France and Germany jointly led a move to suspend the Stability Pact to avoid sanctions over their excessive deficits, setting a precedent for others.

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