PARIS (MNI) – Despite a looming recession in Europe, the
appropriate policy response is not economic stimulus but rather further
deficit cutting measures and a reform of governance in the Eurozone,
French Finance Minister Francois Baroin said Sunday.

A rapid application of the fiscal compact agreed by most EU leaders
last month would help turn the economy around, Baroin predicted in a
radio interview over the weekend.

The minister rejected the latest proposal of French Socialist
presidential candidate Francois Hollande for the launch of large
infrastructure projects at the EU level. “A policy of big projects is a
policy of debt,” he warned. “It is not the time for stimulus, for an
increase in public deficits.”

Baroin added: “We must reduce our deficits. It’s not a very sexy
policy, perhaps it doesn’t sell well. But it’s necessary.”

A parallel strategy is to boost cost-competitiveness by funding
through other means a part of the social payroll taxes employers
currently must pay, Baroin said. “We must bolster growth and talk about
financing social protection. Perhaps that doesn’t draw crowds, but it’s
the most effective for our economy.”

The minister offered few clues about alternative financing for the
family support payments now funded via payroll taxes, except to say that
all options are on the table and that the tax base should be broad. This
suggests that the government is leaning toward combining a hike in the
VAT rate with a higher CSG tax on investment earnings.

Baroin declined to talk directly about a recession in France. “My
conviction is that if the December 9 [EU Summit] accord is applied
rapidly …we can exit the crisis we are experiencing — recession or
not, it’s a significant slowdown — more rapidly than in a traditional
[business] cycle,” he said. “If we correct governance at the Eurozone
level, in my view we will catch up faster.”

Next month the government will detail its proposal for a tax on
financial transactions, Baroin said, noting that sovereign bonds would
be exempt. He hinted that the tax might be imposed at the company level
rather than on the assets involved, since this could limit the flight of
financial players to tax-free zones. The timing of the application will
be discussed with Berlin, he added.

— Paris bureau: 331 4271 5540; email: ssandelius@marketnews.com

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