France Plans $33 Billion in Economic Stimulus; Central Banks Cut Rates

By Edward Cody
Washington Post Foreign Service
Friday, December 5, 2008

PARIS, Dec. 4 -- Facing a drastic slowdown, France announced a $33 billion economic stimulus plan Thursday, including cash payments to the poor, a bigger rebate on new-car purchases and a speedup in high-cost public works projects.

The effort, outlined by President Nicolas Sarkozy, was the latest in a series of programs undertaken by European governments to mitigate economic fallout from the financial crisis that migrated across the Atlantic in September, shaking the continent's banking system and strangling hopes for growth.

Also Thursday, the European Central Bank, with the same objective in mind, announced in Frankfurt that its prime interest rate would be shaved by three-quarters of a percentage point, to 2.5 percent, the largest cut in its history and the second since the crisis erupted.

Simultaneously, the Bank of England announced a full-percentage-point cut in its interest rate, pushing it down to 2 percent. The decision marked an effort by Prime Minister Gordon Brown's government to act in concert with the 15 countries that use the euro to put more cash into the hands of European business owners and households.

"The economies are in sync, and meetings happen with the same frequency, and they all reached the same decision," said Andrew Scott, an economics professor at the London Business School.

The extra government spending in France, one of the 15 euro countries, implied a willingness to assume further public debt, already estimated at more than 3 percent of the French economy, and contradicted Sarkozy's campaign pledges to cut official spending and produce a leaner government. But officials emphasized that the measures were designed to be temporary and that much of the money could be considered investment that would bring growth.

"We do not have a choice," Sarkozy said in a speech at Douai, in northern France. "Doing nothing would cost us a lot more."

Critics, however, accused Sarkozy of doing too little, too late. "These are baby measures, not in proportion to the problem," said Ségolène Royal, the Socialist Party candidate who lost to Sarkozy in the 2007 presidential election.

Sarkozy delivered his speech next to a Renault plant, signifying his recognition that the auto industry has been hit particularly hard since the financial crisis dried up credit, imperiled jobs and sapped consumer confidence. Sales of new cars in France sank by 14 percent in November, according to the French Automobile Manufacturers Association, despite discounts of up to 20 percent. Several companies and parts suppliers have announced layoffs and cutbacks in work hours.

Against that background, Sarkozy announced a rise to $1,250 in the government-financed rebate for people purchasing a new car to replace an old vehicle. A smaller rebate was already in place as an environmental measure.

Since taking office in May 2007, Sarkozy has promoted an effort to have French industry invest heavily in environmentally friendly products, predicting they will be highly coveted in the years to come. French businesses have been allowed tax write-offs for high-tech research, particularly research that focuses on the clean-air industry. That arrangement was enhanced in the stimulus package announced in Douai; officials said more than $12 billion of the new stimulus package would go to quicker reimbursement of tax credits for research-oriented investment by small and medium-size businesses.

"Our response to the crisis is investment," Sarkozy said.

About a third of the stimulus package was earmarked for public works, including railroad infrastructure and low-cost housing projects. Most of those initiatives were planned, anyway, aides acknowledged, but the schedule was moved up to get money into the economy faster and maintain employment.

The Finance Ministry's National Institute for Statistics and Economic Studies reported Thursday that unemployment rose by a tenth of a percentage point in the third quarter and now affects 7.3 percent of the workforce in mainland France. The numbers confirmed anecdotal reports of job losses across the country since the slowdown began.

The cash payment to the poor was set at $250. It was promised for the first quarter of 2009, disappointing some who had expected it to be disbursed in time for Christmas.

Officials said the main targets were the working poor and laid-off workers, who could be expected to spend the entire sum quickly. Sarkozy announced a separate set of measures Wednesday to boost government aid for the destitute.

Special correspondent Karla Adam in London contributed to this report.

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