Danger Zone

July 5, 2012

French President Francois Hollande faces a difficult decision. Continue to risk his country’s ability to borrow by making good on pro-growth policies that he campaigned on, or make needed budget cuts. The country is currently on track to run a 6-10 billion euro ($7.56 -12.6 billion dollar) budget deficit this year and 33 billion in 2013. Such high deficits exceed the European Union’s target budgetary figures and with its fiscal state becoming more and more precarious, France is approaching a cliff that Spain, Portugal and Greece have already fallen off.

Recently, the country’s national audit office reported that the country was “in the danger zone” and risks falling into a “debt spiral,” should spending continue or be ramped up according to campaign promises made by Hollande. This puts the newly elected President at exact odds with his campaign platform and highlights just how difficult the Euro Zone’s crisis has become. Prompted by the news, Fabrice Montagne, an economist at Barclays commented, “We believe the government will not shy away from implementing potentially harsh measures in order to meet is deficit target.” Montagne went on to say that the credibility of the government could be tarnished if the deficit target was not reached. But, while Mr. Montagne is confident, those at RBC Capital Markets believe that any increased spending from Hollande’s administration could add to the budgetary problems, pushing the country close to the edge.

With pressure from all sides, Hollande is in a difficult position to say the least. Meanwhile though, the EU is concluding negotiations in Brussels to keep the rest of the 17 member group from falling into bankruptcy and to ease pressure on those who already have. Unfortunately for Hollande, if spending is not reduced, he may need the same aid that he is negotiating with other countries for now.

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