Memo to France: Don't Do as America Did -- Slash the Deficit

A memo to members of the French Parliament: Listen to what your President says about the urgency of cutting your nation's deficit.

We learned the hard way in the United States what can happen when political divisions get in the way of tackling the budget deficit. It's not easy, and most cuts won't be popular, but it's got to be done in today's shaky global economic environment -- or else.

Or else France will end up like the United States, a global leader with a credit rating downgrade blemish that could have and should have been avoided.

Not long ago, the U.S. was just like France is at the moment -- safe in its AAA debt rating status. Standard & Poor's has reaffirmed its outlook for France as stable in its AAA rating, as have Moody's and Fitch. But President Nicholas Sarkozy didn't rush home Wednesday from vacation for no reason.

France must slash its deficit, or run the threat of losing AAA status as the U.S. did when political divisions kept leaders from pushing deep enough in cost cuts to avoid the downgrade. They didn't get it done, and now the world knows the result.

Sarkozy summoned members of his government back from vacation Wednesday for an emergency meeting on financial turmoil involving France's budget deficit. Although much of the rumor seems to be based merely on fear, talk that France could become the next major economy to be downgraded put it in an uncomfortable spotlight.

France is the world's fifth largest economy. The nation's finances have been strained as its economy is barely growing at all, while others in the eurozone in worse shape have required a helping hand.

In an effort to avoid America's plight, Sarkozy returned early from his vacation to give his finance and budget ministers one week to come up with new measures to cut the crippling debt burden.

Sarkozy said in a public statement France's pledge to reduce the budget deficit from last year's 7.1 percent to three percent by 2013 "will be kept whatever the evolution of the economic situation."

The statement was an obvious attempt to calm French equity markets,which dropped Wednesday as bank stocks came under particular selling pressure.

But the markets want more than words. France has failed for years to reduce its deficit -- and no other eurozone economy with a AAA debt rating has a higher debt ratio than France's, currently around 85 percent of national income.

That's far better than the U.S., considering the world's largest economy is currently running at a debt to GDP ratio of 100 -- the first time that's happened since World War II.

But France's economy is growing slower than the U.S., if that means anything, since neither is really growing at all. Also, France has the burden of other struggling eurozone countries.

So while ratings agencies have affirmed France's AAA rating, that could change just as it did in the U.S., when leaders didn't effectively address the problem.

For Sarkozy to back up his promise, that his pledge to reduce the deficit will "be kept whatever the evolution of the economic cycle," he's going to need the support of three-fifths of Parliament.

That's why Sarkozy is urging all parties to overcome political divisions to get the cuts passed, protecting France's AAA rating.

U.S. President Barack Obama made a similar plea to political leaders during debt ceiling talks. It's just that many didn't seem to listen. Or they didn't care to listen.

Thus, eyes are now cast upon France and Sarkozy to see if they can get a better result.