--France Can Lower Public Deficit to 1% of GDP If Spending Controlled

By Yali N'Diaye

PARIS (MktNews) - Economic activity in France and the eurozone should remain robust this year with 3% GDP growth, compared with 2.5% to 2.7% in the U.S., according to Raymond Douyere, member of Bank of France's advisory Monetary Policy Council.
France's public deficit can still be cut to 1% of GDP from 1.4% in 2000, even though growth will probably be weaker than the 3.3% official forecast last September, Douyere argued in an exclusive interview with Market News International.
"Eurozone growth will remain robust this year despite some negative impact from the U.S. slowdown," he said. "French and EMU GDP growth can still be around 3% this year," since fallout from the U.S. will be limited and concentrated in the first half, he said, noting that Germany is more exposed than France to the U.S. slowdown.
Since the eurozone's exposure to Asian countries is bigger than to the U.S., "the impact of the U.S. slowdown here is more likely to be felt via Asia," Douyere said.
"Unless there is a sharp recovery in the second half of this year, 2001 U.S. GDP growth is likely to be between 2.5% and 2.7%," Douyere said, expecting a deceleration in the first half, followed by a stabilization and a gradual recovery.
Along with only a small exposure to the U.S. economy, France and the eurozone will benefit from strong domestic demand, he predicted.
In France, "opinion polls show that in all sectors order books are well filled, inventories are at reasonable levels -- not in surplus, and household morale is exceptionally high," he said.
After the French consumer confidence index reached a record high in January, "household confidence is likely to remain" at high levels, as unemployment will continue lower, although at a slower pace, inflation will decline and tax cuts will continue to boost real incomes.
Thus, "all conditions are in place for solid (domestic) demand in France that should not be limited by supply problems," Douyere said, expecting investment to support growth along with private consumption.
Production bottlenecks in France are stabilizing after a steady rise, even though capacity utilization rates are still markedly above the long-term average, he noted.
Although French growth will likely be less than the 3.3% projection in this year's budget, "a public deficit of 1% of GDP this year is possible, provided that spending targets are respected," Douyere said, reminding that 2000 government budget deficit turned out below target.
Indeed, the central government posted a budget deficit of Ffr191.2 billion (E29.2 billion) last year, down Ffr14.8 billion from 1999, and Ffr24.13 billion below the initial target and Ffr18.3 billion less than projected in the spring mini-budget.
In addition, lower oil prices will make it easier to stick to nominal spending targets and low interest rates will prevent an increase in the debt burden, he said.
The withdrawal of two candidates for France's four UMTS licences will not impact the budget, Douyere said, echoing Finance Minister Laurent Fabius. The government has earmarked the lion's share of UMTS licence revenues for its Pension Reserve Fund and the rest to the reduction of outstanding debt.
As only half of the expected Ffr130 billion UMTS revenues can be garnered if France Telecom and SFR remain the only bidders, the government has said it will hold another tender by the end of this year, without revealing details yet.
"The government is most likely to allow telecom operators to pay over a longer period of time and to adjust the price of the licences if it thinks competition conditions make this necessary," Douyere suggested.
Under the terms of last month's UMTS tender, each licence cost Ffr32.5 billion, of which half is to be paid by next year and the rest over remaining 13 years of the licence.
"If French growth remains strong, around 3% a year for several years," the financing shortfall in the state pay-as-you-go pension system can be delayed to 2010-2015, Douyere said. By that time, "the government will have time to implement new mechanisms for pensions."
Douyere expects pension financing needs to be met pushing back the retirement age, at least for civil servants, and the Pension Reserve Fund, which will collect surpluses from social security system and UMTS revenues.