French Asterix resists austerity in word only

Barricaded in the last free village in Gaul, plucky little Asterix is resisting the massed armies of austerity that have swept across Europe threatening to snuff out economic recovery.

That, at least, is the picture French president Nicolas Sarkozy would like to convey to his domestic audience.

Britain has just announced eye-watering public spending cuts and tax increases. Greece, Spain, Portugal and Italy have all imposed stiff deficit reduction measures. Even Germany, Europe's biggest and most creditworthy economy is planning 80 billion euros in savings measures over the next four years.

But Sarkozy rejects any talk of "rigueur" -- the French word for austerity, refusing to let ministers even utter the term or spell out how Paris plans to bring its swollen deficit down.

Rigour has been a dirty word ever since Socialist President Francois Mitterrand was forced in a humiliating U-turn in 1983 after two years of free spending ended in devaluation, capital flight and massive trade and current account deficits.

In this rebellious nation, mere talk of an austerity plan can bring hundreds of thousands into the streets. Conservative politicians are haunted by memories of mass protests that felled prime minister Alain Juppe's 1995 pension and welfare reforms and defeated subsequent attempts to overhaul rigid labour laws.

Some officials say Sarkozy postponed a June 7 summit with German chancellor Angela Merkel because he did not want to appear alongside her on the day Berlin announced its austerity package, trumpeted as setting an example to Europe.

In reality, his resistance to austerity is mostly tactical -- to avoid inflaming the citizenry and wrecking his prospects of re-election in May 2012. Behind a thick smokescreen of rhetoric, France is tiptoeing towards austerity.

Not before time, many economists would say. Public spending accounts for 54% of gross domestic product, the highest in the euro zone. The deficit is projected to top 8% of GDP this year and the national debt to reach nearly 85%.

"Since 1981, we have been unable to balance the budget in good times with healthy growth," said Jacques Delpla, a member of the government's Council of Economic Analysis. "Inflation and debt were the adjustment mechanisms to postpone real choices."

Furthermore, the economic growth forecasts on which the government has based financial planning -- 1.5% this year and 2.5% in 2011 -- are widely seen as too optimistic.

Unless Sarkozy turns the tide, Paris' top-notch AAA credit rating -- equal to Germany's -- is bound to come under scrutiny.

The "spread" between French and German bond yields, which was negligible for the last decade, has widened to more than 50 basis points or 0.5% in recent weeks.

So while Sarkozy is projecting a "don't worry, be happy" message to voters, economy minister Christine Lagarde is signalling serious retrenchment ahead to the financial markets.

"Once we have gone through the necessary and very unpleasant budgetary negotiations, we will be making further announcements," she said this month.

The government aims to soften up public opinion with a report from Michel Camdessus, a former International Monetary Fund managing director, on the state of public finances, and revised growth forecasts in early September.

The Camdessus commission recommended amending the constitution to include a mandatory five-year financial planning law to balance public accounts, with all spending measures enacted in the annual budget and not, as often happens, slipped into other legislation through the year.

Sarkozy has called for a German-style deficit reduction clause to be inserted into the constitution, but he appears to lack the parliamentary super-majority required to achieve this. Even some of his ministers are loath to see their hands tied.

The European Commission reckons France's underlying core deficit -- excluding extra spending and lower revenue due to the 2008-9 recession -- is now more than 6%, equivalent to Greece's average over the decade since the launch of the euro.

That is partly because the pensions and health care systems are also deep in the red.

"France needs to start more effective consolidation," EU Economic and Monetary Affairs Commissioner Olli Rehn said in an interview last week.

Plans outlined this month to raise the retirement age to 62 from 60 by 2018, make people work longer for a full pension and raise public sector contributions to private sector levels were praised by market analysts and credit watchdogs as a first step.

"France is making more progress," says David Riley, head of sovereign ratings for Fitch Ratings.

But tougher austerity measures applied elsewhere in Europe, such as freezing public pay or making generous family allowances conditional on means-testing, are fraught with political danger.

France has no shortage of experts telling the government uncomfortable truths, but like the bard in Asterix's village, they tend to be bound and gagged and put up a tree.