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SIMON HEFFER | France has lived beyond its means

The renowned political commentator and historian, turns his gaze to France and the French

WHEN I read in Le Figaro on the penultimate weekend of August that François Fillon, the French prime minister, was appealing for national unity, I took it as confirmation not that things were pretty bad, but that things were really, really bad. In Britain, we can only recall our prime ministers doing something similar when there is a war on, or when - the next best thing - the trades unions were misbehaving and threatening to bring governments down, as was routinely the case in the 1970s when Sir Edward Heath was in charge.

The French are culturally different from the British in that respect. The game doesn't have to be up for them to sound such an alarm. They like to think that unity, as opposed to partisanship, is more natural and attainable by a people who continue to accept the outcome of the events of 1789 as reasonable. This may be so: but things are still bad. A few days after his appeal, M Fillon announced a set of budgetary measures that left many French eyes watering, in both the over-stuffed public but also in the much put-upon private sector.

The deficit is to be cut by a further €1 billion this year and an additional €11bn in 2012. Some taxes will rise, some tax breaks will be lost, but resources will be reduced.

It seems slowly to be occurring to the French political class that the country has been living beyond its means for years - the budget hasn't been balanced since the days of Georges Pompidou - and that this is unsustainable. That much is true. Whether the measures just announced to address this will be enough, and will work, is quite another matter.

A decade or so ago, shortly after the establishment of the single currency, it became clear to anyone who wished to look at the figures properly that an accident was on the cards. The new Central Bank in Frankfurt decreed that deficits should not exceed 3% of gross domestic product. There were announcements of terrifyingly large fines for any member nation that violated this rule. Nations routinely began to violate it. The fines were not enforced. How could they be? For a start, any country that felt it was so in need of cash that it had to borrow extravagantly would hardly have the resources to pay such a fine. But when any attempt was made to levy one an appeal was immediately lodged and, in the interests of the continuation of "the project", the punishment was normally commuted to an advisory slap on the wrist. No-one took the blindest bit of notice, including the French, who routinely broke the 3% limit.

That in itself was not France's undoing. However, the country continued to lend epic amounts of money to other countries that were violating the rules in a spectacular fashion, notably Greece. France now has 56% of Greece's almost incomprehensible debt, and a couple of its banks are said to be tottering. This cannot but have a knock-on effect for the rest of the economy.

However, because of the country's exposure to dodgy foreign regimes, not all of this is within M Fillon's control. If Greece, or Italy, or anyone else has to default (and this is not so fantastic a prospect as it might once have seemed), then a French bank could easily begin to go under.

At that stage, M Fillon faces a call that we in Britain had to make in the autumn of 2008: does he let a bank go down, or does he tie up a vast sum of French taxpayers' money trying to save it? For if he has to do the latter, the €12bn he is hoping to save next year will look like small change. That is how dangerous things are.

During the last month President Sarkozy has done his best to appear on top of things, by returning from his holidays early (quelle horreur!) and setting up talks with Angela Merkel, his German counterpart. The second of those acts betrays the reality of France's position.

Nothing to save the euro, or to save the big constituent economies of the eurozone such as France, can be done without the Germans. They are the only country of the 17 in the euro who have the resources and the economic potential to steady world markets and reassure investors. That, too, is a measure of the peril that France is in.

Mrs Merkel knows that she will, one day, have to face her electorate. They are already fractious, not least in her own party, about the squandering of German wealth on the profligate countries of Club Med. If she feels it is politically expedient for her to rein in financial support, France will not be in the same boat as Germany. It would be in the same boat as Greece.

By introducing his package of cuts, M Fillon hoped to rescue France's AAA rating by the international credit agencies, and to create such confidence in France's economic probity that foreigners will start to buy French debt again and drive down the price of doing so.

This was not an unreasonable ambition - it has happened in Britain, which has convinced the international markets that it is serious about debt reduction. But France, with its enormous public sector, and a tax-burden top-heavy on the productive sectors of the economy, still has an enormous distance to travel before it starts to look economically sound.

It is all very well bumping up the tax on cigarettes and Coca-Cola, but M Fillon, by increasing the tax liabilities of the wealthy, seems not to see that he is driving productive capital away from France when it needs it most.

How Sarko must give thanks for the priapism of Dominique Strauss-Kahn, and the consequent absence of a credible candidate against him at next spring's elections.

Simon Heffer also writes for the Daily Mail

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