France fails budget target, Hollande faces reform dilemma

France is way behind budget targets, new data shows, deepening a dilemma for President Francois Hollande over spending cuts which could split his allies, or doing a U-turn in dangerous defiance of the EU. The official figures put the budget overshoot, or public deficit, at 4.3 percent of output last year instead of 4.1 percent as targeted. This raises the stakes for France and Hollande sharply the day after an election debacle for his Socialist Party, analysts said. Hollande went on French television Monday evening to announced that he has named popular Interior Minister Manuel Valls as prime minister, seen as pro-business, to replace Jean-Marc Ayrault. Economists questioned by AFP said the critical question was whether the president would change economic policy to respect commitments to the European Union, or possibly put EU targets aside. That second option could cause damaging tensions with the EU, European Central Bank and Germany, but Hollande said in his address he was trying to balance the two sides of his dilemma. "It is about reforming our state ... and preserving our social model. In short, we want to be both fairer and more efficient," Hollande said in his address. He said Valls would be charged with implementing a package of pro-business policies known as the Responsibility Pact, balanced by a new "solidarity pact" which would include steps to boost spending on education and health, reduce income and payroll taxes - provided they can be financed by cuts in state spending elsewhere. Hollande added that the government Valls will form will have to convince Europe "that France's contribution to competitiveness, to growth, must be taken into account with respect to our commitments." The Socialist government faces a deadline to present EU authorities with a programme for financial stability by the end of April. It has already obtained an extra delay for cutting the deficit to the EU's normal ceiling of 3.0 percent of output, on condition it enacts deep reforms. But it also faces revolt on the left of its supporting ranks against deficit targets set by the EU and against the recent pro-business swing in policy. These internal tensions have been fuelled further by the humiliating losses in local elections on Sunday. In Brussels, EU economic affairs spokesman Simon O'Connor had already warned that the expected deficit overshoot meant that France would have to come up with extra budget measures in the next few weeks. At Natixis bank in Paris, economic research director Philippe Waechter said that the government would now have great difficulty in achieving the EU-agreed target of a 3.0 percent deficit in 2015. The head of analysis at the respected French economic think tank OFCE, Xavier Timbeau, said that if France held to the EU target, it would have to cut spending. Alternatively, it could focus on structural reforms, and leave deficit reduction until later. He held that the better solution would be to copy the approach of the new government in Italy, enacting structural reform, ending austerity and abandoning the target for 2015 which "will put the French economy on its knees." - Greens warn government - Hollande, handicapped by weak economic growth and the failure of a promise to stop unemployment rising, has switched the direction of his Socialist policies with the "Responsibility Pact" which cuts charges on companies. This would be paid for by spending cuts of 50 billion euros ($69 million) over three years. But this effort to correct the uncompetitive position of business, widely acknowledged as a huge drag on exports, employment and growth, is bogged down amid hostility from the left towards cuts in state spending. The leader of the Green senators, Jean-Vincent Place, warned on Monday that the pact "will not be voted by the majority". In February the number of unemployed people rose by 0.9 percent to a record 3.34 million. This is believed to have counted against the Socialists in the elections. The latest deficit for 2013 of 4.3 percent of GDP does mark a big reduction from 4.9 percent in 2012. However, it means that the government faces a huge task, in economic and political terms, in meeting its commitment to the EU. The data from the INSEE statistics office showed that the public debt, or accumulated deficits over many years, amounted to 93.5 percent of GDP. That compared with 90.6 percent the previous year, but the government had estimated it would be 93.4 percent. The deficit figure means that excluding any spending cuts under the pact, the government would still have to find 25.0 billion euros over two years just to reach the EU target. In 2013, public spending accounted for 57.1 percent of output, compared with a government target of 56.9 percent. At Berenberg bank in London, economist Holger Schmieding commented that France would trail behind its neighbours "until the political elite bites the bullet of thorough reforms".