By Stephen Sandelius

PARIS (MNI) – The austerity package unveiled Wednesday by French
Prime Minister Francois Fillon goes in the right direction, but more
will probably be needed to reach deficit targets in the coming years
given the risks of anemic growth, analysts argue.

“France will have to implement additional fiscal cuts” to reduce
its deficit to 3% of GDP in 2013, predicted Commerzbank analyst Jutta
Kayser-Tilosen. “Moreover, the country will have to introduce reforms to
strengthen growth. That is the only way to reduce the debt-to-GDP ratio
in the long run.”

For Tullia Bucco at UniCredit, the half-point downward revision in
the government’s forecast for GDP growth next year to 1.75% still
underestimates the loss of economic momentum due to market tensions and
“the tightening of financial conditions, which we expect to have a
damaging impact on GDP growth.”

Even if the economy begins to recover gradually in the second half
of next year from its current “soft patch,” the statistical effect
should leave average GDP growth at only 1.1%, she predicted, stressing
that the uncertainty of this forecast is very high.

Whether or not the still-optimistic official growth forecast for
2012 is a merely a “strategic move” to bolster business sentiment will
be more clear once the details of next year’s budget are released, Bucco
said. “I do see a risk that further austerity measures may need to be
announced sometime next year.”

Jean-Christophe Caffet at Natixis believes that this year’s public
deficit target of 5.7% is within reach, but he is “more pessimistic for
next year,” predicting that the deficit will overshoot the official
target of 4.5% by 0.4 point.

While the government appears to be counting on investment and
private consumption to support the economy, the deterioration in the
financial situation of most firms since the crisis “suggests that at
least one of these motors of activity may stall,” he warned, forecasting
GDP growth of 1.2% next year.

“The measures announced last evening are clearly welcome, but they
could naturally turn out to be insufficient if activity slows more than
expected,” Caffet said. “We think they will allow the French government
to finance itself under very favorable conditions, even if the market is
looking more critically at European AAA’s at this moment.”

Dominique Barbet at BNP Paribas also believes that growth next
year, while very uncertain at this stage, is likely to be closer to 1%.
Still, the evident determination of the government to meet deficit
deadlines is “reassuring,” he said.

“That’s what the markets and rating agencies are demanding — that
the targets be met even if growth is not as strong as hoped,” he said,
predicting that further austerity measures would be introduced later if
required.

The numerous tax hikes and reductions in tax write-offs aimed at
boosting public revenues by E1 billion this year and E11 billion next
are “in accord with the government’s growth assumptions,” Barbet noted.
“If there is less growth in 2012, other measures will be needed.”

Further belt-tightening is likely to be put off until after the
presidential elections next spring, Barbet argued. “If things go very
badly, one cannot rule out a hike in the value-added tax,” he said. That
could increase revenues quickly, though “it would have the most negative
impact on activity.”

Even if power at the top changes hands in next spring’s
presidential election, the new government will most likely respect the
commitment to lower the deficit to 3% the following year, Barbet
ventured, citing the “remarkable consensus” that has emerged among the
mainstream political parties over the past year “under the pressure of
events.”

Analysts also highlighted the absence of structural reforms in the
austerity package and the minimum recourse to new spending cuts, limited
to E500 million this year, E1 billion next year and — eventually — E3
billion in 2013.

Some effort has already been made on the spending side, Barbet
acknowledged. “But if the limit has been reached, it’s a bit worrisome
for the medium term.”

With the election campaign in the offing, officials no doubt
preferred to stick to cosmetic budgetary adjustments and leave the
decision on far-reaching fiscal reforms to the voters, Caffet suggested.

The latest austerity measures “won’t resolve fundamental problems,”
agreed Barbet. “That’s the job of the next government.”

–Paris newsroom +331 4271 5540; email: ssandelius@marketnews.com

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