France Considers Further Austerity

The Wall Street Journal

By DAVID GAUTHIER-VILLARS

PARIS—The French government pledged Wednesday to consider fresh tax rises, spending cuts and other budget measures to ensure the country doesn't deviate from a challenging deficit-reduction trajectory as market concerns that France's top-notch creditworthiness is at risk accelerated.

French bank shares were hammered Wednesday also, with some traders citing the triple-A jitters. Shares in Société Générale were down over 18% in afternoon Paris trading and BNP Paribas shares slid over 10%.

President Nicolas Sarkozy, who interrupted his summer holiday on the French Riviera for an unscheduled meeting with some of his cabinet Wednesday morning in Paris, will make decisions on the new budget measures on Aug. 24, his office said.

France's commitment to reduce its budget deficit is "imperative," Mr. Sarkozy said during the meeting, according to a statement released by the Elysée presidential palace.

The surprise cabinet meeting and the announcement of likely extra belt-tightening efforts came as economists have started to question whether France—the euro zone's second largest economy after Germany—can retain its triple-A credit rating and avoid being swept up in the broad reassessment of the creditworthiness of highly indebted developed countries.

Credit-rating firms say France's prized triple-A rating isn't under review—all three of the main ratings companies reiterated that point again on Wednesday. Yet, economists are concerned that the French government was too optimistic when it factored a 2% economic growth forecast in this year's budget. Lower-than expected growth would almost certainly result in lower tax collection and make it harder to achieve the government's 5.7% budget-deficit target in 2011 and a goal to bring the deficit below 3% of gross domestic product in 2013.

Credit-default insurance costs on France rose further Wednesday. France's five-year credit default swaps were trading at 1.68 percentage points, which means it costs an average of $168,000 a year to insure $10 million of debt issued by the country. The move was 0.07 percentage point wider on the day.

Data due Friday are expected to show that, after a strong first quarter during which France's economy expanded at a brisk pace of 0.9%, economic growth slowed in the second quarter to a paltry 0.2% or 0.3%, according to economist forecasts.

Mr. Sarkozy so far has said his government wanted to make sure France was back on a solid growth path before cautiously and gradually withdrawing stimulus measures introduced in 2008 and 2009 after the global financial crisis struck.

A sharper-than-expected slowdown, however, would increase pressure on Mr. Sarkozy's government to announce large, unpopular spending cut.

Measures aimed at guaranteeing that France sticks to its budget reduction targets could include the cancellation of various tax breaks, the creation of a special income tax for high earners in addition to fresh spending cuts, French government officials have said.

Mr. Sarkozy has already pushed through unpopular fiscal and budget measures: he isn't replacing one out of two retiring civil servants, and France's minimum retirement age is set to gradually increase to 62 years from 60. Yet, any new round of austerity measures would go against Mr. Sarkozy's 2007 electoral pledge that he "wasn't elected to increase taxes" and could hurt his efforts to seek a second mandate in 2012.

To convince creditors that France, which hasn't had a balanced budget in more than three decades, is now resolved to live in accordance with its means, Mr. Sarkozy has also proposed enshrining budget discipline into France's bylaws.

The opposition Socialist Party so far has said it wouldn't support the constitutional change, saying Mr. Sarkozy's proposal amounted to "a gadget."

—Gabriele Parussini and Art Patnaude contributed to this article.

Write to David Gauthier-Villars at David.Gauthier-Villars@wsj.com