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Sarkozy's return

Gavin Hewitt | 08:57 UK time, Wednesday, 25 August 2010

bregancon_afp.jpgFor the French president "la rentree" has arrived; he returns from vacation today and holds his first cabinet meeting. This is also the start of two months that will define his presidency and his chances of re-election.

Nicolas Sarkozy's pension reforms, which are at the heart of his claims to modernise France, will be tested on the streets. The retirement age is due to go up from 60 to 62. Workers will have to work longer and pay more towards their older age.

On 7 September the unions are planning a day of strikes and protests. There is likely to be widespread disruption. They want this to be the biggest day of action so far. It will be a critical battle of wills. The French government wants the pension reform approved by parliament by October. Everyone knows, however, that many previous reforms have been defeated by street protests.

At the same time, the government has to announce how it will cut the budget. France is committed to reducing the budget deficit from 8% to 3% by 2013. Mr Sarkozy
resisted the moves towards austerity announced by other countries. His ministers were told not to mention "la rigueur" - austerity.

But times have changed. The ratings agency Moody's hinted that France was edging closer to losing its AAA status. If that were to happen it would be a disaster for France. Not only would the cost of borrowing increase but the country and its president would lose serious face.

So last week Mr Sarkozy interrupted his vacation and summoned his finance and budget ministers to the Fort of Bregancon. Projections of growth for next year, which were widely disbelieved, were scaled back from 2.5% to 2.00%. There are still plenty of observers who doubt these new figures. But all of this was intended to signal to the markets that France was serious about reducing its deficit.

So an austerity package will have to be unveiled. To reduce the deficit to just 3% by 2013, 100bn euros (£82bn) of spending cuts or tax increases have to be found. The government has already ruled out increases in VAT, income tax and corporation tax. It is looking to eliminate 10bn euros in tax loopholes. Greater pain cannot be avoided. Civil servants' pay is likely to be frozen. There will be no increases in state spending.

Cuts are difficult for any government; they will be particularly difficult in France. The country had an easier path through the recession than most other European economies. It will now have to be explained why the public sector has to be reduced.

For the president, facing re-election in 2012, he already sees his poll ratings hovering around 34%. Moves against illegal Roma camps have not given him an autumn "bounce" that some expected.

"Nicolas Sarkozy gives the impression his hands are tied, "said Francois Miquet-Marty, an analyst at Viavoice. "Ultimately the impression is that he is at the mercy of the economic climate rather than in control of it."

The next few weeks will be a formidable challenge for the French president.

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