September 28 2012

Key details of France’s toughest budget in decades. Huge day for president François Hollande. Spanish bank stress tests are due today after the market in Madrid closes. Moody’s could downgrade Spain tonight. Spain’s bond yields rise…

Powered by article titled “Eurozone crisis live: France hikes taxes in tough budget” was written by Graeme Wearden, for on Friday 28th September 2012 13.26 UTC


Suggested lunchtime reading: My colleague Jo Moulds has spent the last few days in Portugal, where the public rose up against the government over its latest tax rises. She writes:

We have reached the limit. People are tired of making sacrifices because you don’t see any improvement whatsoever. Quite the opposite.” Marina Padeiro, 36, is one of Portugal‘s estimated 1.3 million unemployed – a number that has shot up in the past year and a half, as a result of the stinging austerity measures imposed on the country in exchange for a €78bn (£62bn) bailout.

Sitting in a café in the northern industrial belt of Lisbon, she shrugs. “If there was some sort of hope you may see a decent future … the problem is they are not showing it to us.” Her father, a retired lorry driver, says the evidence is on the streets. Out here – far from the capital’s pretty, cobbled centre, which still attracts tourists – shops are closed up for good, or open only sporadically.

The full story is here


There’s speculation that Moody’s could downgrade Spain to junk status tonight, capping a troubled week for the country.

The rating agency had set itself a deadline of the end of September to decide whether to leave its credit rating as Baa3, the lowest investment-level grade.

That runs out at Sunday evening, suggesting it could be announced before the close of business tonight. Perhaps just as the Spanish banking stress test results are out.


DSK in Athens

While François Hollande was fine-tuning today’s budget (see 10.49 onwards), his former rival Dominique Strauss-Kahn has been visiting Greece.

The former IMF chief has spent the last two days or so in Athens, including plenty of time in a a bar by the Athenian riviera.

Helena Smith reports that DSK”s lighting visit to Athens made the front pages today – adding to some light relief over all the gloom and doom of yet more austerity measures.

The disgraced former IMF chief may be down and out but he is not unhappy, according to the leading Greek daily Ethnos which splashed this morning on the Frenchman’s lightning visit to Athens.

DSK arrived in the capital on Wednesday “for a private matter” but then proceeded to spend most of the next 24 hours with friends in a seaside restaurant and bar.

Ethnos reports:

During the time he spent at the bar of the restaurant, the former IMF chief … chatting to those around him made of point of saying how much he loved Greece and its people. When asked about the economic crisis he said the situation was difficult but that with great effort the problems could be overcome.

The daily said it was not until 5am on Thursday that DSK was spotted returning to his hotel – a fairly humble establishment — on Athens’ main commercial boulevard Ermou.


Sophie Dworetzsky, partner at law firm Withers LLP, believes that the 75% top rate of tax announced as part of the French budget today will drive more wealthy people over (or under) the Channel:

Back in June, David Cameron raised French hackles by promising to “roll out the red carpet” to French firms if Hollande slapped a new levy.

Dworetzsky reckons the UK PM should get the hoover out:

We may need to spruce up Britain’s red carpet for the French sooner rather than later, given President Hollande’s latest announcement. Since Monsieur Hollande’s election we have seen a definite, and strong, increase in French individuals and corporates investigating the best, and most tax efficient way to relocate to the UK and minimise their French tax burden.

Typically, we are asked how to avoid becoming UK-resident for tax purposes, but it in this case UK residence is highly favourable, whereas French tax ties are seen as a burden’.


After a solid start, shares are now in retreat in Spain and Italy.

Italian FTSE MIB: down 176 points at 15273, – 1.1%

Spain’s IBEX: down 100 points at 7741, – 1.28%


Mario Monti might stay on

Over in Italy, Mario Monti’s announcement last night that he might stay on as Italian prime minister beyond next spring has upset Italian politicians who were itching to regain power.

From Rome, Tom Kington reports:

Until yesterday, the technocrat called in last November after Silvio Berlusconi stepped down was promising he would hand over the reins to elected officials following elections next year.
But that promise was beginning to startle the markets, which admire Monti’s appetite for austerity and fear the free spending and anti-European views of some Italian politicians.

Only yesterday, a resurgent Berlusconi was railing against Monti’s tax hikes and envisaging a German exit from the euro (as well as stumbling over his exchange rate arithmetic), while comedian turned politician Beppe Grillo continues to discuss a referendum on Italy staying in the euro.

But the real victim of Monti’s return would be the centre left Democratic Party, which is currently leading the polls and could see its chance to form a government go up in smoke if Monti offers to lead a coalition government.

Reacting to Monti’s statement, party leader Pier Luigi Bersani said that if anyone “thinks they can pre-book the election, making it practically useless, imagining that I will form a majority with Berlusconi or with Grillo, I will step back, I will miss a turn.”

Many in the City would be reassured by the prospect of Monti staying on, although his lack of democratic legitimacy is a concern.


French opposition blasts Budget

The French budget has been criticised by a member of the French opposition.

Gilles Carrez, a member of the right-wing Union for a Popular Movement, claimed that Hollande’s government was simply hiking taxes without making long-term economic reforms.

Carrez,who chairs the French Parliament’s finance committee, said (via Reuters):

Never have households and companies been subjected to such a fiscal shock. It’s a very bad choice. More savings should have been made…

There are no structural measures. Therefore, it’s a short term-focused budget with no vision. There’s nothing about the competitiveness of companies whereas that should a major priority.


Greece’s new austerity measures

Over to Greece again, where officials are refusing to deny or confirm reports in the media today about the measures.

Our correspondent Helena Smith says while the agreement is still tentative – ahead of further negotiations with the troika – Greek reports are suggesting that the vast majority of the savings will come from further cuts to state spending, pensions and public sector salaries.

Helena has analysed the reports, and reports:

• Around €10.5bn of the total €13.5bn package will come from cuts in government expenditure and €3bn from the levying of new taxes, according to reports.

• Once again pensioners and civil servants will bear the brunt of the austerity with €6.5bn being earmarked in cuts to wages, pensions and benefits.

• From 2013, the retirement age will also rise from the current 65 to 67.

• Pensions currently worth between €1,000 and €1500 will be slashed by 2%, between €1,500 and €2,000 by 5% and above €2,000 by 10%. Bonus holiday payments (known as the 13th and 14 wage or pension) will be eradicated for both retirees and civil servants.

All in all, pensioners will lose roughly a month’s worth of payments.

• According to the reports, some 15,000 civil servants will also lose their jobs between 2013 and 2014 – a measure that will reportedly save the government around €150 million. Public sector employees will have salaries reduced by 10 percent although staff employed with state-run utilities will see their wages drops by as much as 30 percent . Police, the judiciary and military personnel, who have joined anti-austerity protests in recent weeks, will also have their wages slashed by anywhere up to 23 percent.

Helena adds:

Then media is also making much of the new taxes that will be slapped on Greeks, already at the receiving end of a barrage of levies since Athens sought recourse to the EU and IMF with a first bailout program in May 2010.

The self-employed – long believed to be the most brazen tax evaders – will be particularly hard hit with taxes of up to 35 per cent on income earned. Bank deposits will also be taxed at a flat rate of 15 percent although in a bid to kick-start business corporate income taxes will be brought down from 42.5 percent to 35%


French PM defends budget

Prime Minister Jean-Marc Ayrault declared that today’s French budget will put France back on its feet. Here’s the key quotes:

This is a fighting budget to get the country back on the rails.

It is a budget which aims to bring back confidence and to break this spiral of debt that gets bigger and bigger.

Ayrault also described the target of 0.8% GDP growth next year as “realistic and ambitious”.


Today’s French budget contains around €20bn of new taxes, broadly as expected. It’s interesting that the most controversial measure, the 75% income tax on the wealthy, is only expected to raise €210m.

It is expected to affect between 2,000 and 3,000 people.

Changes to France’s wealth tax (levied on those with high personal wealth) will bring in almost five times as much.


How credible is the prediction that the French economy will grow by 0.8% next year? Well, it’s in line with the latest IMF forecast, made in July.

However, it would probably be too optimistic if the eurozone crisis were to escalate. The Bank of England’s forecasts, for example, exclude the worst case scenario in the euro as the impact is unquantifiable.



The first details of the French 2013 budget are out now!

Here are the early highlights.

Economic projections

• The Budget forecasts economic growth of 0.8% in 2013 and 2% every year between 2014 and 2017.

• The deficit is forecast to drop to 3% of GDP in 2013, and then to 2.2% in 2014, and 1.3% in 2015

• Public spending will remain stable at 56.3% of GDP in 2013

• The National Debt will rise to 91.3% of GDP in 2013

• The structural deficit will be eliminated by 2015

Tax and Spending changes

• New tax rises worth €10bn for “wealthy households”…and €10bn on big businesses

• €4bn will be raised by cutting corporate tax relief on interest payments

• €2bn will be raised from French households through a new tax on share dividends

• A marginal tax rate will be created, at 45%, tipped to raise €320m

• A new ‘exceptional’ 75% tax rate for highest incomes, tipped to raise €210m

• Lowering the threshold for France’s wealth tax, tipped to raise €1bn



JUST IN. The French cabinet has approved the 2013 budget at this morning’s meeting.

Prime minister Ayrault has described it as a “combat” budget.

We should get the details shortly, and the City is eager to hear the details:


Spain’s sovereign debt has slipped in value today, pushing the yield on its 10-year bonds over the 6% mark (to 6.03% right now).

More pressure on Madrid to take a bailout.


Economics professor Paul Krugman (the Keynesian’s Keynesian) has blasted Europe for its austerity fetish.

In a new column for the New York Times called Europe’s Austerity Madness, Krugman argues:

Spain didn’t get into trouble because its government was profligate. On the contrary, on the eve of the crisis, Spain actually had a budget surplus and low debt. Large deficits emerged when the economy tanked, taking revenues with it, but, even so, Spain doesn’t appear to have all that high a debt burden.

It’s true that Spain is now having trouble borrowing to finance its deficits. That trouble is, however, mainly because of fears about the nation’s broader difficulties — not least the fear of political turmoil in the face of very high unemployment. And shaving a few points off the budget deficit won’t resolve those fears. In fact, research by the International Monetary Fund suggests that spending cuts in deeply depressed economies may actually reduce investor confidence because they accelerate the pace of economic decline.


Greece prepares to show Troika its cuts plan

In Greece, the day has also got off to a lively start with widespread media leaks of the new measures that are in store for the country. We’ll have a summary shortly…

Our Athens correspondent Helena Smith reports that the Greek media is giving blanket coverage to the looming package of budget cuts, following the government’s announcement yesterday that it has reached a “basic agreement”.

But much of the agreeement could change, however, as the package now estimated at a whopping €13.5bn in spending cuts and tax increases (more than 5% of GDP), has to be “negotiated” with Athens’ troika” of creditors first. Helena explains:

Mission chiefs representing the EU, ECB and IMF, who have spent the past week out of Greece, will return to Athens at the weekend. Finance minister Yiannis Stournaras is already lined up to present the package to them on Monday.

Prime minister Antonis Samaras, who heads the conservative-led coalition, is also expected to meet the troika officials in what Greek officials are hoping will be a “problem-free process” to getting the package approved. After months of nail-biting negotiations over the cuts (and it must be added often saltily-worded exchanges) between the governing alliance’s three party leaders, a huge hurdle has finally been crossed. But, as the authoritative Ta Nea reported this morning, while there is “agreement inside,” a “marathon outside” still has to be conducted before the curtain on the drama of the measures finally comes down.

Samaras has made clear that he wants to see the package endorsed by Greece’s 300-seat parliament (where the tri-partite coalition enjoys a comfortable majority) as soon as possible and certainly before the next summit of EU leaders in Brussels on October 18. Having the package in his suitcase will enable the leader to better negotiate with the EU over prolonging Greece’s fiscal consolidation program, say aides. Extending the adjustment period by two years is now seen as essential to ameliorating the impact of the measures, the government insists. But the leader appears to have met resistance from his two junior coalition partners.

While both agree on the urgency of the extension, they have also made clear that they do not want parliament to vote on the measures before the extension has been agreed with the EU. The socialist Pasok leader Evangelos Venizelos argues that the two-year grace period will change the package as deadlines will be radically altered.


Yesterday’s Spanish budget has been well-received in the financial markets, with the European indices all higher.

FTSE 100: up 18 points at 5798, + 0.3%

German DAX: up 32 points at 7322, + 0.45%

French CAC: up 6 points at 3446, + 0.2%

Spanish IBEX: up 44 points at 7886, + 0.57%

Italian FTSE MIB: up 80 points at 15529. + 0.5%

As we reported yesterday, the Madrid government pledged to reduce its budget deficit to 4.5% of GDP in 2013, through around €40bn of cuts. We don’t get full details until the weekend, though.

Given the scale of Spain’s economic challenge, traders may be giving Mariano Rajoy’s government the benefit of the doubt. There could also be relief that the budget did not provoke major demonstrations on the streets.

Another theory is that the budget measures brings Madrid closer to that bailout request. Marc Ostwald of Monument Securities explains:

Market reaction has initially been positive, but only because of the perception that this takes Spain one step closer to an ECB OMT programme, though the gaming tactics of Rajoy over recent weeks and months suggests that markets may well have to apply renewed pressure to Rajoy to push Spain into the arms of the ESM/ECB.

And as our own Giles Tremlett pointed out last night, Madrid faces a serious confrontation with the Catalan parliament over its drive towards independence:

Spain’s deputy prime minister, Soraya Saenz de Santamaría, warned that the government would stop any attempt at a unilateral referendum, effectively challenging the Catalans to either desist or break the law and face the consequences.

“There are legal instruments to stop this,” she said, pointing out that the government could simply apply to the constitutional court to ban it before it was held. “And there is a government that is prepared to use them.”

More here.


The French budget is expected to outline €30bn in fiscal adjustments, split between increases in taxation and cuts to government spending.

• €10bn in extra taxes (mainly on wealthier households)

• €10bn in corporate tax rises and elimination of tax breaks

• €10bn from government spending

The details are closely awaited. Despite protests from some business leaders, Hollande is expected to deliver on his pledge of a 75% top tax rate.


French Q2 GDP change confirmed at 0.0%

The French government were given a reminder of their economic problems this morning, with confirmation that France’s GDP was unchanged in the second quarter of 2012. That means the economy has been flat for the last nine months.


French PM: Budget is about struggle and reconstruction

The French people are already braced for a budget to remember. President François Hollande has told them to expect “the most important fiscal effort in 30 years”.

It is expected to include €30bn worth of fiscal adjustments.

The goal is to cut the French deficit to 3% of GDP in 2013. That, Paris believes, means France can still stand alongside Germany as a proud member of the eurozone core.

Prime Minister Jean-Marc Ayrault told France 2 television that today’s budget was about securing France’s future, saying:

This budget is about struggle, about reconstruction.

If we abandon the (3 percent) target, our interest rates will rise immediately.

The budget will be presented to the French cabinet around mid-morning. Reuters says Hollande is putting his “fiscal credibility on the line”

In the Daily Telegraph, Louise Armitstead reckons French sovereign debt could be hit if Hollande disappoints, writing:

Bond traders on Thursday were poised to dump French debt if Mr Hollande reneges on his promise. The handling of Europe’s second biggest economy, which is on the verge of recession and a public debt of almost 90pc of GDP, is being carefully watched around the world.


Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

It’s a big day. In France, president François Hollande is presenting the details of the 2013 budget to his cabinet this morning. The budget is expected to include tough spending freezes and tax rises for the wealthy as Paris struggles to rein in its deficit.

The budget is seen as a huge test of Hollande’s credibility. Can he deliver a credible plan to bring France’s finances into line, without driving the already stagnant French economy into a downturn?

It’s also another crucial day for Spain. After yesterday’s painful budget, attention now turns to its financial sector. The results of the audit into the Spanish banks is due this afternoon, and will show just how troubled they are.

The Spanish stress test results could push prime minister Mariano Rajoy closer to applying for financial help; a move that could further fuel public opposition to his government.

As usual we’ll be tracking the developments in Paris and Madrid. We’ll also be reporting from Athens, where coalition leaders yesterday reached a “basic agreement” on a fresh package of budget cuts. © Guardian News & Media Limited 2010

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