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France to raise taxes in deficit battle

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The government of France acknowledged Wednesday that the country’s economy is slowing and announced $16 billion in new taxes to ensure it reaches its deficit-reduction targets.

The measures, including higher income taxes on high-wage earners and stiffer levies on alcohol, tobacco and soda, come as the country tries to safeguard its AAA credit rating — something considered critical to the stability of the 17-nation euro zone.

Emergency programs put together for Greece, Ireland and Portugal — and potentially needed to help Spain and Italy — hinge on the region’s stronger economies and their ability to borrow money at the lowest possible rates.

In a late afternoon news conference, French Prime Minister Francois Fillon lowered official projections of France’s expected growth this year to 1.75 percent from 2 percent — a small change, but one that confirms a worrisome dynamic that is spreading across the euro area. As growth slackens, it will be harder for countries to control the government deficits that have undermined confidence in the region. Yet the additional cuts and tax increases required to meet budget targets can slow growth even more.

With French President Nicolas Sarkozy heading into an election year, the government had maintained a higher growth estimate as recently as last week. But France’s markets have been rattled by rumors of a credit downgrade, and its banks are considered particularly vulnerable to the problems related to hefty government borrowing in places such as Greece and Italy.

The lower growth rate is expected to continue through 2012, Fillon said, as the U.S. economy weakens and Europe’s continued troubles take their toll. But he said it was nevertheless critical for France to keep its deficit reduction on track. The country aims to reduce its annual budget shortfall from an amount equivalent to 7.1 percent of annual economic output in 2010 to less than 6 percent this year and to 3 percent — the general benchmark for euro area economies — by 2013.

The International Monetary Fund’s most recent analysis of the French economy noted that among Europe’s AAA-rated countries, France had the greatest total outstanding debt, worth more than 80 percent of the country’s gross domestic product. Slower growth or missed budget targets could, within five years, put the figure close to 100 percent. The fund said France “cannot risk” such a path if it wants to maintain a credit rating that will help it underpin the euro zone economy.

France is the second-largest economy in the euro zone, behind Germany, and is responsible for about 20 percent of the funding for the $600 billion rescue program set up for weaker euro zone nations.

As France imposes the new austerity measures, Europe is suffering a steady stream of poor economic news. On Tuesday, Swiss banking giant UBS announced steep job cuts and Germany showed a sharp drop in a measure of the nation’s business confidence.

Italy recently announced even deeper cuts than in France. Italy is the euro area’s largest debtor and is considered too large a nation to rescue if it runs into trouble.

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