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France: France introduces further austerity measures

November 23, 2011

On 7 November, the government unveiled a new plan to trim the budget deficit by EUR 7 billion in 2012 and EUR 11.6 billion in 2013, which comes on top of the August austerity package already included in the 2012 budget draft. The package aims at compensating the downward revision of economic growth assumptions for 2012 (from 1.75% to 1.0%) and to meet the deficit target of 4.5% of GDP in 2012 and 3.0% of GDP in 2013. The deficit-reduction plan entails, among other measures, a one-time 5% increase in corporate tax for large corporations through 2013, an increase of the reduced-VAT from the current 5.5% to 7.0% (except for some basic goods) and further reductions in health-care spending. The austerity plan is aimed at shielding the country against contagion from the European debt crisis. Fears of contagion have already prompted international rating agencies Moody's and Standard and Poor's to place France's current AAA rating under revision. French borrowing costs are increasing as contagion from the debt crisis spills over into the core economies of the euro area. The 10-year bond yield reached 3.12% on 3 November , which pushed the yield difference, or spread, with German securities to 133 basis points, the most since the euro was introduced in 1999.


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