1. Prospects of debts and deficits in the French new political era Jérôme Creel (OFCE & ESCP Europe) Paul Hubert (OFCE) Francesco Saraceno (OFCE) This paper was prepared for the Conference “Fiscal and debt policies for the future” hosted by the Cambridge Trust for New Thinking in Economics, Cambridge (UK), April 11 2013. Part of this research benefited of funding from the EU Seventh Framework Programme (FP7/2007-2013) under grant agreement 266800 (FESSUD).

2. Motivation Context: – Candidate Hollande against the Fiscal Compact – Sovereign-debt crisis: contagion to the Eurozone & a divergence device within the Eurozone – France is in-between the strong ‘core’ and the ‘periphery’: common features with the ‘core’ and the ‘periphery’ – President Hollande will apply the Fiscal Compact

3. Outline French Public finances: a comparison and its key components Managing public debt Assessing the consequences of the Fiscal Compact on French macro variables

4. French public finances: international comparison

5. French public finances: spending and composition

6. French public finances: receipts and composition Properties usually attributed to the French tax system: Tax levies are high The income tax has a narrow basis The tax system is not progressive The tax system is complex

7. French public finances: deficits (1) DEF = AS + CADEF = IP + PDEF = IP + PAS + PCADEF

8. French public finances: deficits (2) DEF = AS + CADEF = IP + PDEF = IP + PAS + PCADEF

9. Debt: are issuances an issue?

10. Debt management

11. Costs or benefits with the Fiscal Compact? Methods Two assessments – Empirical VAR estimates of output gap & inflation (CADEF and debt exogenous variables) btw 1972 & 2008 4 possible fiscal rules from 2010 on Counterfactual simulations – Theoretical Small-scale new Keynesian model with both BL and FL expectations; AD depends on public spending; risk premium on public debt; Maastricht-consistent calibration 3 possible fiscal rules from 2012 on Out-of-equilibrium simulations

12. Costs or benefits with the Fiscal Compact? Empirical results (1)

13. Costs or benefits with the Fiscal Compact? Empirical results (2)

14. Costs or benefits with the Fiscal Compact? Theoretical results

15. Conclusion Yes, France has had high deficits and debts Yes, France has had automatic stabilisers Yes, France has managed its debt wisely Yes, France has had a sharp fiscal contraction Yes, France has suffered from the stringency of EU fiscal rules Yes, the end of the tunnel has not yet appeared.