France Is Psyched for Deficit Valentine

Meeting budget-deficit targets isn’t France’s strong suit, but it’s looking increasingly likely that President Francois Hollande will be given some breathing space next week, when the European Commission puts out economic forecasts for the euro zone.

The previous forecasts, in November, tabbed the 2013 French deficit at 3.5 percent of gross domestic product, which would be the sixth straight year that France has overshot the 3 percent limit set down in European law.

But laws are made to be judiciously applied, especially economic laws like Europe’s much-maligned stability pact. It was softened in 2005, then re-toughened in response to the debt crisis. Even in its souped-up form, it isn’t exactly a cudgel.

The commission, for example, has been falling all over itself in issuing public reminders that fiscal behavior will be judged in “structural” terms, factoring out the bad stuff happening in the economy. Olli Rehn, the economics commissioner, made that point in an open letter to national finance ministers yesterday — in case they weren’t paying attention to him during their monthly meetings on the two previous days.

For France, the bleak state of affairs came through in today’s data showing a 0.3 percent drop in fourth-quarter GDP, wiping out the minimal gains of the previous three quarters and making 2012, on balance, a no-growth year. Hence the cascade of warnings from Hollande, Finance Minister Pierre Moscovici, Foreign Minister Laurent Fabius and the national auditor that 2013 will bring less growth and more deficits.

This is where the nominal/structural distinction rides to the rescue. Getting the nominal deficit below 3 percent is mainly of sporting interest. Instead, France will be judged by a ruling dating back to November 2009, when the debt crisis was still germinating.

That ruling bound France to deliver average annual “structural” deficit reduction of 1 percentage point of GDP for the years 2010-13. France was set to clear that bar by the barest of margins, delivering 1.025 percentage points of average annual austerity, according to the commission’s November forecasts.

So the numbers don’t look that inconvenient for a Socialist government determined not to overegg the austerity. Whether the math holds — and whether the commission buys the French claim that 2 percentage points are in the offing in 2013 — will become clear with the next forecasts on Feb. 22.

France is the European economic establishment’s biggest headache. Unlike the four “program countries” or Italy, it hasn’t been forced by the markets, the troika, or both to fundamentally re-gear its economy. Politically, however, it is too French to fail.

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