France: government lowers GDP forecasts for 2013-14.
Merkel’s CDU/CSU party won 41.5% of votes at Sunday’s elections, securing 311 seats, 74 more than in 2009, but falling short by five of the 316 threshold ..…
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that would have allowed the Chancellor’s formation to govern alone. The likeliest scenario remains a grosse koalition with the SPD, which garnered 25.7% of the vote and 192 seats (only 46 more than in 2009). For the first time in post-war history, the FDP did not make the cut and will not be represented in Parliament. A CDU-Green party coalition (black-green) remains unlikely, not only because surveys show that the CDU electorate would prefer a coalition with the social-democrats, but also considering that the Bundesrat is controlled by the SPD, therefore such a choice would force Merkel to govern with split Houses. Negotiations with the SPD (which is holding its party convention as we write) still haven’t begun, and may once again prove long and tense. In 2005, it took 65 days for the CDU and SPD to strike a deal. Therefore, after Sunday’s success a challenging phase has opened up for Chancellor Merkel. As already observed a coalition with the SPD should not result in changes to management of the euro area debt crisis and to the gradualist approach to the transformation of European institutions, and debt mutualisation. The debate will revolve around domestic issues. Although during the election campaign Merkel ruled out tax hikes, in recent days the CDU opened to change to the tax regime. Negotiations will probably also be centred on the distribution of the key ministries. We believe Schauble is very likely to be confirmed as Finance minister, given the role he played in managing the debt crisis, and provided that there is no clear alternative among SPD representatives. Beyond the uncertainty which is typical of negotiation phases, in our view a “grand coalition” should prove moderately positive for Europe. In her new spell in office, Merkel will also have to press on with reforms on the domestic front, as to date the German economy has benefited from the reforms of the early 2000s, but new challenges must now be met to guarantee resilient potential growth in the medium term (1.3% according to the OECD’s latest estimates, vs. an average rate of 1.9% for the advanced countries).
The document presented Wednesday morning by the Hollande government before Parliament provides for a 15 billion euro budget, worth 0.9% of GDP. Spending cuts will contribute 0.7% (11.4 billion circa), and tax hikes 0.2% (around 3.6 billion). The cuts will be spread across all levels of the public administration, whereas households will bear the brunt of tax hikes. Fiscal pressure on enterprises is re-modulated, but not slackened. As regards the state’s administrative costs, overall savings will amount to 5.2 billion: 2.6 billion will come from the optimisation of central structures, 0.9 billion from the staff cuts (around 2,000 units), and a further 1.7 billion from wage cuts. A further 3.3 billion will be raised at the local administration level. Lastly, 2.9 billion in savings will be achieved through the cancellation of investment projects, the reduction
of subsidies and benefits, and reduced coverage of sick days. On the whole, the “weight” of state costs will drop from 57.1% of GDP to 56.7% in 2014 (vs. 56.6% in 2012, however). New tax revenues (3.6 billion) will almost entirely weigh on households, as fiscal pressure on businesses has been “stabilised” for 2014. The main measures on this front are an intervention on family allowances (1 billion), the abolishment of tax reductions on school expenses (0.4 billion) and on group health care schemes (1 billion), taxation of the 10% bonus on pensions received by parents with more than two children (1.2 billion). Fiscal pressure will presumably hit a peak of 46.1% next year, from 46.0% this year: therefore, the “tax hiatus” promised by Hollande is effectively nothing more than a stabilisation. The government has revised downwards its growth forecasts for this year and 2014: GDP growth is estimated at +0.1% in 2013 (from +0.2%), and +0.9% in 2014 (from +1.2%). As a result, the deficit/GDP ratio has also been revised, to -4.1% (from -3.7%) in 2013, and to -3.6% (from -2.9%) in 2014. Public debt is therefore estimated to increase further, from 93.4% this year to 95.1% in 2014. To conclude, the 2014 draft Budget Law is on the whole reasonable and likely to be endorsed by European authorities, even though it does not address the competitiveness issue.
Source: BONDWorld – Intesa Sanpaolo – Research Department
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