French Finance Minister Speaks at Council on Foreign Relations
Ladies and Gentlemen,
Good morning and thank you for being here today. I’m very pleased to join you in this discussion. As often as my schedule allows, I accept invitations from think tanks in France and abroad. Because It’s very important for us politicians to have this kind of exchange with people who are able to “think out the box” .
I could start this conversation with the same reflexion that you made a minute ago, what the difference a year makes. I am the French finance minister since May 2012, and I remember my first visit was here in the US with the president Hollande, meeting president Obama, just two days after his installation because he was on the move to G8 and NATO summit in Chicago, and then we move to Los Cabos for the first G20 meetings we had to attend. And I remember what the ambience was, it was all about Europe, and about Euro. Everybody wanted to ask us, is euro going to exist in 6 months from now? Is Greece going to get out? And obviously we were felt as the sick man of the world economy. I remember Los Cabos meetings about crisis with President Obama, Angela Merkel, Mister Hollande, Mister Rajoy, Mister Monti at the time and the finance minister around Tim Geithner, looking all the time for solutions. And a year after, there is almost not a word about the euro in the final communiqué of the Saint-Petersburg summit, so things changed and improved for the Eurozone and other kinds of problems raised elsewhere – I’m not gonna be talking about the US economy for the present time.
But Today, I’d like to talk to you briefly about how France is turning
around its economy in a Europe that’s finally seeing the light at the end of the tunnel. This may also be an opportunity for me to rebut some widespread assumptions. France is on the move. So is Europe, for that matter, and particularly the euro area. However, it’s true that this motion looks like tectonic plates: it’s deep, it’s slow, it’s not always visible, or visible enough. I know from experience that changes in the “old” continent may go unnoticed, especially seen from here.
First, a word on the situation in France.
To illustrate the changes in progress in my country, let me start with the draft 2014 budget that I officially presented to the Council of ministers, the administration and the Parliament two weeks ago. I don’t want you to believe that my presence here is sign of my reluctance to defend the budget before Parliament – although it is always a tough task. Our budget is robust and fully reflects the approach we’ve followed ever since President Hollande was elected in 2012:
What is in our budget?
First of all, a reflection of the historic reduction in labour costs that we have implemented in support of our key objective, namely, restoring the competitiveness of French business. We’ve made the diagnosis that we suffered from a deficit of competitiveness, a lack of competitiveness. And In a word, we have chosen to reduce labour costs by 20 billion euros a year, which represents 6% of the labour costs, through a system of tax credits for businesses. The 2014 budget embodies this historic ambition, which is already helping France narrow the labour- cost gap with its major European partner, and friend and competitor, Germany.
The draft budget also includes many other measures to promote competitiveness. For example, it contains the latest in a long series of decisions I’ve made to revamp the financing of the economy. I’m referring to a reform of savings regulations that will make it easier for firms to access new sources of equity financing. This is in addition to all the other measures concerning the financing of the economy that we’ve taken in the past year and a half. We have reformed public mechanisms to support budget financing, notably through the creation of a Public Investment Bank, which works alongside with private investment banks. We have introduced measures to support cash flow. We have channelled savings and investment to small, medium-, and mid-tier enterprises by diversifying their access to financing.
In parallel, we are bolstering this plan to restore French competitiveness with a major improvement in the regulatory environment for business. In the past, France lawmakers have sometimes displayed a rather unbridled creativity in this area. What we want is to stabilise and slim down the legislative framework. That’s what the president called a streamlining shock in order to reduce the weight of legislation from the French administration in order to make it easy for business to work. This is about competitiveness.
Second orientation, the 2014 budget reaffirms France’s commitment to balancing its public accounts. Let me give you some numbers here. Not too much but some.We inherited a very tough situation as far as public finances are concerned, with 600 billion euros of additional debt in the five years before we took office, and the deficit in 2011 stood at 5.3% of GDP. If nothing would have been done, it would have been the same
for 2012. We are reducing this deficit 4.8% in 2012. it willbe 4.1% despite an almost 0 growth for this year. 3.6% for 2014, under 3% as we are committed to through Europe in 2015.
At this point, you’re going to tell me: if you’re raising taxes to balance the accounts, your plan might be only moderately effective. This is why we are changing the cost of the effort as far as reducing budget is concerned. Now we work through cuts in public expenditures, they represent 80% of the effort planned in 2014, taxation being 20%.. And what we want to do is have 100% as a part of the effort in 2015. That’s our budget program.
At the same time, we believe fiscal stabilisation should be conducted at a pace compatible with changing economic conditions. As you may know, the European Union requires from euro-area countries to make significant progress towards medium-term budgetary objectives for their budgetary balances and to hold their nominal deficits below 3% of GDP. We were supposed to do so in 2013, I negociated with the Commission, and especially with Commissioner Olli Rehn, whom you may know, that France obtain a 2-year extension of this deadline, not because we were not ready but in order to let the automatic stabilizers play their role and not to kill growth in France and in Europe.
In the negotiations, we were helped by the evolving international consensus on the right balance between austerity and growth. And things probably happened here in Washington in the meetings of April. nd we feel very close in the debates to the Obama administration, and I work in very close contacts of course with Tim Geithner yesterday, with Jack Lew today. The U.S. and France defend positions that are quite similar,
which is to say what we lack now is this 1%-2% a year and we need to faster growth, we need to, of course, go on with fiscal consolidation but at the pace and under conditions which are compatible with growth.
The third component of our budget, but through the budget I tell you what we’re doing of course, is contained in the financial provisions that immediately follow it and cover the field of social spending in France. It consists of a set of structural reforms, the first of which is pension reform. We conducted this much awaited reform to restore the financial sustainability of our pension plans. The adjustment that we decided to implement will be divided evenly between reductions in expenditures and increases in contributions for everybody.
This is not the only structural reform that we conducted, and it is obviously not the last. I will mention a few of them, I talked about competitiveness and reducing the labour cost, I talked about reducing deficits, I talked about reducing the amount of public expenditures. I should also and I will talk about reform of the labour market. We drove the most important reform of the labour market led in France in the last 40 years in dialog between the businesses and the trade unions. We finally found an agreement between them, which was translated into legislation in order as well to secure the personal situation of the workers and to give more flexibility for the firms when they have to adapt. I know that this is part of the image of France to have a not flexible enough market. We are moving through what is called in Northern Europe flex-security, flexibility and security.
Among these major structural reforms, I also want to mention what we call Government Modernisation. The process of “Government Modernization” will enable us to review all public policies by the end of our term in office in 2017 So that through evaluation we can lead intelligent cuts. If the cuts are unintelligent it creates resistance and no efficiency.
These initial assessments have already enabled us to identify savings that are incorporated into the 2014 budget. I will give you just one example. I knopw it will terrify some of you but I will still do that, we found that there were in the legislation over 7,000 different business- support mechanisms, we are reducing that, and we will save 1.5 billion euros in 2014 We also want to reform the policy on family.
In short, our draft budget focuses on three priorities, which are the priorities of the action of president Hollande and the government: first, support to competitiveness; second, a sustained yet pragmatic fiscal adjustment; third, a set of structural reforms. This is the way to change France, also with social justice and an action to reduce unequalities which is of course a major cause for the government. But we want at the same time to maintain our social model and reform it very deeply, that’s what the government is committed to.
There’s one key component of our economic policy that I’d like to mention here in order to end my speech: it’s Europe. To give you an idea, as a finance minister but you mentioned that I spend I would say a third of my time or maybe more on Europe, as well in Europe, and here, abroad, G20, G8, G7 meetings. The European dimension to me is so important in the lives of the euro-area Member States it’s not an international issue,it is a domestic one. France and Europe are the same, there is an absolute continuum between the two
dimensions when you come to public policies. To evaluate France’s attractiveness without the European dimension, to address France’s economic recovery without the European dimension, to envision France’s future status in the global economy without the European dimension makes no sense.
I’d like to share some random observations with you about this subject – to which, I must confess, I’m passionately committed.
The first is that the euro area is in better shape. The peak of the crisis is behind us, there is no more existential crisis. The questions raised a year ago do not exist anymore. Yes we will survive. No Greece won’t get out. Yes the integrity of the Eurozone is saved. Yes we found tools in order to address those tough situations that we faced during those last five years. And yes we are making also progress in order to the banking union.: And I want here to pay a special tribute to the European Central Bank which obviously played a major role in order to stabilize, alongside the Eurogroupe, the situation in Europe. The question is now, ther is no more crisis of the Eurozone, there is a crisis in the Eurozone, which is a crisis of the lack of growth.
And we must consolidate these early and still frail signs of improvement. You mentioned the fact that we went out of recessions after 6 quarters of a year of consecutive negative growth
I’m not pessimistic. I think we can reach this goal. I’m convinced not only that we shall attain it, but that the euro area will emerge both deeply transformed and stronger from this crisis.
I know Europe well. I’ve devoted a large part of my political life to it. Even today, Europe is a central concern for me as a finance minister. Europe is a project that we are building step by step. Conditions are difficult, we are not a federal state, we are what Jacques Delors, former president of the Commission called something like a federation of national states, which means that our decision making is complex. We have to decide all together at 17, tomorrow 18 members of the eurogroupe, 28 members of the Greater Union, with different cultures, political cultures too, and I think that we are in a phase of a new integration for Europe.
And I want finally to spell out the priorities that France is urging its partners to adopt in order to achieve success.
Further diagnosis, one sentence, The euro area’s problem today is that it is an effective and integrated monetary union, it is not an economic and political union.
France has a pretty good idea of what’s needed to finish this great but
essentially unfinished task:
First, we must collectively define a pace of fiscal consolidation compatible with economic conditions. I’ve already talked about this, so I won’t dwell on it here, except to say that, and this is a very important observation, if we compare to US and Japan, Europe has the weakest growth, the highest unemployment, the lowest deficits, and a trade surplus. It means our policy mix should be more vigorous in a way.
In parallel, we must create the conditions for a lasting return to growth. This requires restoring the economy’s financing channels. And this is why banking union is so important. Banking union means putting an end to the financial fragmentation of Europe, we must do that, and we must achieve that before the end of the year 2014.
Still, we won’t make European integration meaningful again only by addressing the financing of the economy, we also need to work on politics. And I want to end with it, to give you maybe two or three proposals of political integration of the Eurozone which are necessary in my view.
First, France is on the view that need to have a euro area-specific budget, that should be designed. It’s a part of I would say budget federalism in Europe. In order to play a countercyclical role, especially in some social fields like to help thos who are unemployed.
In parallel, we must restore clarity to EU political institutions, which are responsible for safeguarding our common interest. Then again, France has proposed two innovations: first, the establishment of a euro- area chamber in the European Parliament to co-legislate in the EMU’s interest; second, the creation of what I call to be brief a euro-area “Finance Minister” – a permanent and exclusive Eurogroup Chairman – I will take an example. Today the Chairman of the Eurogroupe is not in Washington, because he has to lead very difficult talks in his country Netherlands. It’s not a problem with him, he’s a friend and he’s doing the right job, but if we have a permanent Minister of Finance well this question does not exist. We need to have that permanent representative and the guy, or woman, can coordinate the action in Europe and especially in Eurozone.
What’s at stake here, of course, is the economy. But so is democracy And one last word about that, as you may know we have European elections next year that will be also the renewal of the Commission. All the institutions will be renewed in 2014.
And In France as in Europe, There is a raise of the far-right and the populist parties, which are anti-Europe and anti-euromovements. And this is why frankly Europe, and France, because France is at the heart of Europe, France is the second economy of Europe. France, with Germany, is the driving engine of Europe. It doesn’t mean that when France and Germany get along things are perfect but if they don’t nothing happens in Europe. So for us there is this main fight against populism and the only way to win this fight, which is decisive for democracies is to deliver, deliver results on growth, on jobs. And that’s what it is about, that’s why France is reforming, that’s why Europe is moving, and that’s what we must do together.