The French government has unveiled an austerity plan valued at 12 billion euros between now and 2012. And the lion's share will be concentrated in higher taxes. France will raise the price of alcohol, tobacco and soft drinks; eliminate some exemptions; will modify taxes on public limited companies; will increase tax pressure on capital returns; will abolish certain tax benefits on real estate investments; will revise the vehicle tax and impose a symbolic and temporary tax of 3% on incomes greater than 500,000 euros per year.
This is a significant collection of measures that could offer some breathing room after the markets put pressure on the economy when GDP forecasts dropped. Still, with elections happening in less than eight months and Sarkozy struggling in the polls, he is looking elsewhere for answers.
And France has a competition problem. Whereas before they had a surplus, they are now posting numbers in the red. And their growth could be affected further by higher taxes and stalling growth worldwide. France needs to enact the reforms of a country that spends a higher percentage of its GDP than Switzerland. Further, it might have to face restructuring or peripheral bailouts and substantial damages that could be inflicted on the banks. Guided by Merkel, Sarkozy has started down the path of fiscal unity. But soon he could discover that this will be insufficient. While he continues to postpone difficult decisions and instability continues, growth predictions will keep fluctuating and will force us to make even greater sacrifices.