French President Nicolas Sarkozy pledges to stick to deficit-cutting goals

By Greg Keller

Associated Press

Published: Wednesday, Aug. 10 2011 7:30 a.m. MDT

PARIS — French President Nicolas Sarkozy cut short his vacation and promised to pare down huge debts to try to allay rising concerns that France could be the next triple A-rated economy to suffer a ratings downgrade following the United States.

Some analysts have warned that France — the world's fifth-biggest economy and a driver of the eurozone — can't afford to keep bailing out poorer European states, especially at a time when its own growth rates are moderating.

Sarkozy, who along with other European leaders has come under criticism for staying on holiday as the markets were gripped by fear, cut short his vacation on the French Riviera with his pregnant wife to summon key government ministers for an emergency meeting on the financial crisis.

No new measures were announced, but Sarkozy insisted that "commitments to reducing the deficit are inviolable and will be maintained."

Worries over the debt problems afflicting a number of European countries as well as the U.S. have knocked confidence in the global economic recovery and triggered turmoil in financial markets around the world.

Sarkozy said he's asked Finance Minister Francois Baroin to prepare a list of measures to guarantee the government attains its deficit-reduction targets. Sarkozy will take a decision on which measures to implement at an Aug. 24 meeting with Prime Minister Francois Fillon, Baroin and Budget Minister Valerie Pecresse. He also reiterated his call for a constitutional change requiring balanced budgets.

France has for years failed to deliver on its deficit reduction promises

It is now aiming for a deficit of 5.7 percent of national income this year from 7.1 percent in 2010, and 4.6 percent next year. It's targeting a deficit of 3 percent of gross domestic product in 2013, a target that has been delayed multiple times, which Sarkozy has blamed on the global financial crisis.

"We will take the necessary measures to reach these goals," finance chief Baroin said, without elaborating.

Baroin suggested earlier this week that Europe could boost the size of the eurozone bailout fund, the European Financial Stability Facility. But Germany, the region's strongest economy, has been reluctant to do more to support debt-ridden neighbors.

After ratings agency Standard & Poor's downgraded U.S. debt last week, worries surfaced that France could be next to lose the coveted and rare AAA rating, if it continues to contribute to further bailouts of eurozone countries.

Presidential elections scheduled for the spring of 2012 also mean it is unlikely the government will implement further austerity measures at a time when the economy is already slowing.

One indicator of this possible concern has been the recent rise in the spread between German and French yields to 15-year highs. Sarkozy's comments Wednesday appeared to only have a negligible affect on the spread.

"With yields now above those of the Netherlands, Finland and Austria, France seems in danger of slipping out of the core to become more closely associated with the eurozone's periphery," said Jennifer McKeown, senior European economist at Capital Economics.

While France's growth prospects are considerably better than the likes of Italy and Spain, no other eurozone economy with a triple-A rating has a higher debt than France's, which stands at around 85 percent of national income.

In June, the S&P ratings agency warned that should France fail to carry out planned reforms and reduce the deficit, its rating could come under threat.

"If the French authorities do not follow through with their reform of the pension system, make additional changes to the social security system, and consolidate the current budgetary position in the face of rising spending pressure on health care and pensions, Standard & Poor's will unlikely maintain its 'AAA' rating on the French sovereign," S&P said in the June 9 report.

Concerns have also surfaced about French growth. Earlier this week, the French central bank said that France will likely grow only 0.2 percent in the third quarter, while the bank's monthly industrial survey showed both corporate order books and factory utilization rates falling for the second month in a row in July.

Pressures have been mounting on Germany, starting to feel the pain of a slowing European and global economy as German companies see waning demand for their exports.

After Sarkozy's surprise appearance in Paris in the midst of the sacrosanct August vacation season, officials in Berlin made clear Wednesday that Chancellor Angela Merkel is sticking to her plans to stay on holiday and return to the office next week.

Cecile Brisson in Paris and Geir Moulson in Berlin contributed to this story.

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