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France loosens purse strings to rescue virus-hit economy

Marie HEUCLIN
·4-min read
The French finance ministry is lining up the big guns

France loosens purse strings to rescue virus-hit economy

The French finance ministry is lining up the big guns

France is due to present a mammoth spending plan for its virus-hit economy Thursday, hoping to reverse a dramatic downturn in growth and ward off the threat of mass layoffs at struggling companies.

President Emmanuel Macron's government has earmarked 100 billion euros ($120 billion) to counter the devastating impact of the coronavirus at a time when daily virus numbers in France are on the rise again.

The sum, a combination of new spending and tax breaks, is four times the amount France spent over a decade ago to deal with the global financial crisis, and represents a third of its typical annual budget, Prime Minister Jean Castex said ahead of the plan's launch.

The French budget boost is separate from a 750 billion euro European Union plan agreed after acrimonious haggling in July.

Some critics say the money may come too late to save many companies, while others say high hopes for Macron's green revolution in the French economy are likely to be dashed.

The virus impact has plunged the French economy into its worst downward spiral since 1945, with gross domestic product plunging 13.8 percent in the second quarter, after a drop of more than five percent in the first.

The government expects GDP for the whole year to contract by 11 percent.

Economists have welcomed the departure from the kind of austerity measures seen after the 2008 crisis which were "a huge error," said Philippe Martin, who heads up the CAE think tank which advises the government.

This time, "the focus is not on public debt," agreed Xavier Ragot, president of the OFCE economics institute.

The economy saw a lively but brief rebound just after the end of lockdown measures in mid-May, but has since shown worrying signs of sliding back again, while French virus infection rates are back on the rise.

- 'The France of 2030' -

Measures to prevent a feared second virus wave, such as mandatory mask-wearing at the workplace, are seen undermining the very confidence among economic actors that the government is desperately trying to restore.

Unlike the post-2008 crisis response, much of the new plan targets the supply and investment side of the economy, namely businesses.

The measures over the next two years include 10 billion euros' worth of corporate tax cuts.

Youth employment is also a major target of the spending, with 6.5 billion euros aimed at encouraging hiring for millions of new entrants on a depressed job market.

Beyond emergency measures, the government also hopes to stimulate investment in green technologies, and help some economic sectors such as health care become more competitive.

"This is not a strategy to deal with the current difficulties, because that's already done," Macron said last week. "It's to pave the way for the France of 2030."

Some 30 billion euros are earmarked for greener policies, some of which will overlap with the 40 billion planned for the country's re-industrialisation.

"How much is 30 billion when you also spend 17.7 billion every year on fossil fuel, and when you cut corporate tax by 20 billion without asking for anything in return?" said Arnaud Schwartz, head of France Nature Environnement, an NGO.

- Businesses or consumers? -

Others say the government, while keen to help businesses, should not neglect consumer spending that stagnated in July, after a brief spike in the early summer.

French households have accumulated 80 billion euros in savings since March, significant firepower if people could be induced to spend, analysts say.

But the government has rejected calls for a huge VAT cut like the one seen in Germany, saying its heavy financing of partial unemployment measures had already done much to keep households' purchasing power intact.

"The best way to support demand is to create jobs," Finance Minister Bruno Le Maire said.

Denis Ferrand, director of economics research institute Rexecode, said the strategy of favouring corporate investment over consumer spending made sense "because household revenues have remained relatively intact."

Opposition politicians meanwhile have said Macron's plan, which is part of France's 2021 budget to be voted on in parliament only at the end of the year, may be coming too late for many companies.

"Every day lost widens the social divide", said Socialist party spokesman Boris Vallaud.

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