France Should Restrain Its Budget Deficit, IMF Says

By Christopher Wellisz

June 29 (Bloomberg) -- France should restrain its budget deficit as its economy returns to “sluggish” growth next year, the International Monetary Fund said.

“The economic contraction is expected to slow in the remainder of 2009, followed by a sluggish return to growth beginning in early 2010,” the Washington-based agency said in a report released late yesterday. “A return to medium-term sustainability will now be needed” after government spending helped cushion the recession.

Europe’s third-largest economy has contracted for four straight quarters, pushing the jobless rate to more than a two- year high. President Nicolas Sarkozy has introduced about 30 billion euros ($42.2 billion) in tax cuts and spending that aim to pull the economy out of the deepest slump since World War II, inflating the deficit and debt to records in the process.

France’s budget deficit may widen to between 7 percent and 7.5 percent of gross domestic product in 2009 and “probably” will reach the same range in 2010 as the government lifts spending and the recession erodes revenue, Budget Minister Eric Woerth said on June 21.

“With an already high public debt, the cost of the recession and the fiscal stimulus are set to significantly worsen the fiscal outlook over the medium term,” the IMF said in the report. “Decisive implementation of a clear consolidation strategy at all levels of government needs to be anchored in the 2010 budget.”

European governments are under pressure to turn their attention from fighting the recession to smoothing a recovery as investors worry more than $2 trillion in stimulus programs will spark inflation if left unchecked.

Inflation Rebound

“Annual consumer price inflation will dip below zero during the summer months” in France, the IMF said, “but given entrenched wage and price rigidities, inflation is expected to rebound somewhat in 2010.”

The IMF in its April World Economic Outlook projected 0.4 percent growth for the French economy next year, following a contraction of 3 percent in 2009.

The fund yesterday noted that risks to the economic outlook “remain tilted to the downside.” The risks include a further decline in the European Union economy, which buys two-thirds of French exports, and a further increase in unemployment that could sap consumer spending.

To contact the reporter on this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net