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News : EU Economy Last Updated: Oct 28, 2011 - 9:34 AM


Sarkozy cuts France's 2012 economic growth forecast to 1%; France last had a budget surplus in 1974
By Finfacts Team
Oct 28, 2011 - 7:50 AM

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Nicolas Sarkozy, French president, in a French television interview, Paris, Oct 27, 2011.

Nicolas Sarkozy, French president, said in a series of interviews on French television on Thursday evening, that France's economic growth forecast for 2012 has been cut to 1%. He also said the admission of Greece to the euro was a mistake. France last had an annual budget surplus in 1974.

With just six months to go to a presidential election, the president announced that in light of the poorer economic outlook, new austerity measures will be necessary if France is to meet deficit targets and hold on to its treasured triple-A credit rating.

Sarkozy said the government will announce a new austerity plan of between €6 and €8bn after next week's G-20 summit of the leaders of the world's main developed and emerging economies in Cannes. He said the 2012 growth forecast was cut to 1% from 1.75% previously.

"We're sticking to our growth outlook for this year," Sarkozy said in an interview on French television. "For next year, we had forecast growth of 1.75%, but everyone knows that with the economic crisis there is little chance we can hit the target. We have agreed to revise down our forecast and to take it to the same level as our German friends, at 1%, for next year."

The government is to stick to the plan to cut the budget deficit to 3% of GDP in 2013 but despite the austerity, public debt is expected to peak at more than 87% of GDP in 2010.

France's last annual budget surplus was in 1974 while the national debt to GDP ratio rose from 22% in 1975 to 82% in 2010.

The French president said he would work with Angela Merkel, German chancellor, to bring greater convergence between the French and German economies in sectors such as harmonising corporate and VAT tax rates to make the two countries the “heavyweight champion at the heart of Europe.”

Sarkozy said he was confident that Greece will emerge from its debt crisis but in his view it was s mistake in the first place to allow the country to join the euro system.

Earlier on Thursday, Eurozone leaders had forced banks to agree to take a 'voluntary' haircut of 50% on Greek debt. Measures to raise capital at the big banks and a plan to add firepower to the €440bn European Financial Stability (EFSF) fund to bring it potential value up to €1trn were also announced.

The EFSF said on Thursday that Klaus Regling, the chief executive, would travel to Beijing on Friday to discuss how China might contribute to the fund.

"If the Chinese, who control 60% of the world's currency reserves, decide to buy the euro instead of into the dollar, why should we refuse," Sarkozy said. "Our own independence will not be put at risk."

Sarkozy said it was "essential" that the yuan joined the global foreign exchange system.

On French banks, Sarkozy said the government will closely monitor French banks to make sure they withhold their dividends and cut bonuses to boost their capital ratios

France's big four banks need to raise a total capital shortfall of €8.8bn from a total required by Eurozone banks of  €106bn, according to the European Banking Authority. The French banks said they would easily be able raise funds from future profits and by following through on previously announced asset sales.

Charles Dallara: Europe Gets a Debt Deal- - the head of the International Institute of Finance, the big banks' lobby group, who was at the Eurozone summit in Brussels:

Eurozone Shows Recovery Signs: David Carbon, MD, Economics & Currencies, DBS Bank Group Research, shares the overall optimistic sentiment surrounding the hopes for recovery but says EU is only half way there:

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© Copyright 2011 by Finfacts.com

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