Fearing Recession, France Hits Brakes on Austerity (analysis of a Wall Street Journal paper, written for my Financial Derivatives Class)

Fearing Recession, France Hits Brakes on Austerity Last Year, Francois Hollande was merely a candidate in the French elections. At the time, the public debt was 90% of the GDP. Growth had been had been dormant for five years. High unemployment had become the norm. Mr. Hollande claimed to want return France to its triple-A rating and reduce its massive debt. He promised to add new jobs and increase the retirement age. Mr. Hollande also planned to raise taxes on the wealthy to decrease the deficit. He was elected, but he has not improved the French economy, despite his promises. The President started increasing taxes in an attempt to reduce the deficit. This failed, as he had to abandon his vow to reduce the deficit by 3% of annual output. He explained that additional tax increases and spending cuts could make things worse. France is suffering from an unanticipated weaker recovery. Mr. Hollande promised to tackle shortfalls in the pension and unemployment benefit programs, however it does not appear, that he accomplished this. Currently, President Hollande is backing away from more austerity programs as per his recent statements documented in the Wall Street Journal. He said that he “regards more austerity at this stage as a risk, not a remedy”. However, slowing the deficit reduction will increase France’s debt, which is being observed by credit ratings agencies. The fear is that reducing budget deficits at this time may launch France into a recession. Mr. Hollande may have made this decision based on observation of the debacle that was the US fiscal policy. The US government tried to fix the country’s economic problems by introducing a series of stimulus packages. As a result, US deficit increased and is projected to continue to increase. Instead of fixing things, the stimulus made things worse. It seems that for both the US fiscal policy (the stimulus) and the French government’s failure to restructure its economy, turning around a country’s economy is ‘easier said than done.’