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France returns to recession

Dr Ben Clift, Department of Politics and International Studies, reacts to news that the French economy has gone back into recession.

"The current French Government, and the last one, understate the degree to which reductions in public expenditure contained in fiscal consolidation plans will eat away at demand and growth in the economy.

French fiscal policy settings since 2010, and under the Hollande presidency since May 2012, have not been found wanting in terms of ‘fiscal effort’ to restore the public finances. Both key aspects of fiscal consolidation - increasing the overall tax take and curtailing public expenditure have been pursued boldly by both Fillon and Ayrault, albeit with somewhat different emphases in terms of where the burden of increased taxation falls, and what spending commitments should be preserved. Yet these fiscal policy settings have had predictably adverse effects on French growth and employment levels. Hollande’s analysis of the growth impact of austerity during his presidential campaign was pertinent – but in the context of the ongoing Eurozone crisis and economic credibility concerns he has found himself unable to act upon it as he might wish.

The need for fiscal activism in support of demand amidst the ongoing downturn, so accentuated during the Hollande campaign, and the Keynesian insights into fiscal policy impacts which underpinned this analysis, have been somewhat lost in the translation of a new set of fiscal rules on the French statute books. In keeping with the IMF findings of fiscal multipliers research, as regards the French economy government growth rate forecasts are consistently over-estimated, not least because the fiscal multiplier effects if this restrictive fiscal policy are likely under-estimated. In this context what is key is the negative multiplier effects arising from contractions in public spending.

The credibility-sapping upshot of this is a great deal more difficulty than currently envisaged and programmed into budgetary policy-making in France in actually reaching the proposed deficit targets. The targets contained within the 5 year public finance planning exercise integral to the new fiscal policy rules framework introduced in 2012 by Hollande become steadily more exacting as growth falls short of the over-optimistic forecasts it contains."