MNI: French Austerity Plan To Largely Survive Crisis-Officials

France’s plans to cut its budget deficit by EUR44 billion are likely to be reduced by a few billion euros following what looks like the inevitable fall of Prime Minister Francois Bayrou, but the broad thrust of the austerity drive will continue so long as parliamentary elections are avoided, government sources told MNI.

Bayrou is set to lose a confidence vote in the National Assembly on Sept 8, but  President Emmanuel Macron appears to want to avoid parliamentary elections, the officials said, pointing to the fall of former Prime Minister Michel Barnier at the beginning of the year as a guide to what to expect.

"The base case is exactly what happened in December and January. Bayrou will go. The next government will pick up the budget we've been working on for six months, tweak it, maybe give a tax rise to please the Socialists, and maybe then it's EUR38 billion in deficit cuts instead of EUR44 billion"

"The trajectory of French economic policy will continue moving in that direction. In the base case scenario everything will be fine,” one official said, noting that rising yields are being seen in the U.S., Japan and UK as well as in France.

 "There is no particular reason to panic about where France is right now. It's not rosy but we are not in a crisis." (See MNI INTERVIEW: Germany Needs Favourable EU Fiscal Treatment)

MEASURED EUROPEAN RESPONSE

While "there would not be a whole lot of support from Brussels or Frankfurt" in the event that elections were held and led to a more radical government with big spending proposals deviating from France’s Excessive Deficit Procedure goals, European authorities would be unlikely to take drastic punitive measures such as making French bonds ineligible for European Central Bank purchase operations, officials said.

"We have gone sufficiently down this path now - Greece, Spain, yes we have seen this film before - and France is a different animal, but I am sure the conversations will be very quickly had and we will not get to the stage where there is a public discussion about excluding French bonds from ECB eligibility. Let's not waste our time."    

While France could be disqualified from the ECB's Transmission Protection Instrument if it deviated significantly from its current fiscal plans, officials in Brussels told MNI that it would be highly unlikely for the European Commission to push for that, given the risk of provoking a financial crisis.