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Monday, 19 November 2012

France faces the recession and furious at Economist’s ‘Time-Bomb’ cover'

French officials angrily rejected a charge by Britain's The Economist weekly on Friday that France was the "time-bomb at the heart of Europe" and a danger to the euro single currency, accusing the magazine of sensationalism. In reality, many economists are concerned that President Francois Hollande's economic reforms are not ambitious enough, warning that financial markets could turn against France, and so could jeopardize the future of the euro.
The Economist
"Honestly, The Economist has never distinguished itself by its sense of even-handedness," Industry Minister Arnaud Montebourg told Europe 1 radio. Aside from doubts over the scale of its reform efforts, many economists and EU officials are skeptical that Hollande's Socialist government can hit its target of cutting its public deficit to 3 percent of output to 2013 as promised.

Failure to do so could prompt financial markets to demand higher yields for its bonds, which are currently held around record lows of two percent on the perception that France is, a long with Germany, a safe haven in the euro zone.

Yet French public spending accounts for 56 percent of gross domestic product, the highest level in the euro zone, and public debt reached 90 percent of GDP this year. Hollande's deficit-cutting strategy is based on two-thirds tax increases, much of it on businesses, and one-third spending cuts.

The Economist's Europe editor, who wrote the special report, defended the weekly against accusations of being unfair towards France.

Two previous cover stories this year accused France of being in denial about economic reality and called Hollande "rather dangerous", endorsing his presidential election opponent, conservative incumbent Nicolas Sarkozy.

"The point of this cover and the article is to encourage France," John Peet told the newspaper 20 Minutes. "Other countries including Greece and Portugal have conducted many reforms. This is not yet the case in France."

The particular concern is the French tax system- high tax levels in France have recently made the headlines, whether it be regarding the new 75 percent income tax, or over celebrities leaving the country on a quest for tax havens. But this is the least of French problems, - the complexity of the tax system is a major impediment to the growth, neither positive is a constant change to the French Tax code- every year up to 20% get revamped.

The former CEO of EADS, Louis Gallois, has issued 22 recommendations to turn around the country, and the very first item referred to the need for stability and certainty around taxes. The complicated and uncertain tax code on top of the heavy burden of taxes makes it especially unpalatable to businesses.

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