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France fine-tunes pro-reform cabinet after rebel ministers ousted

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[August 26, 2014]  By Mark John and Julien Ponthus
 
 PARIS (Reuters) - French President Francois Hollande fine-tuned his third government team in two years on Tuesday, seeking to reconcile pro-growth measures with deficit-reduction after ousting rebel ministers opposed to budgetary rigor.

He and Prime Minister Manuel Valls were due later to unveil a new cabinet which will make its debut just a few weeks ahead of tough negotiations at home and with EU peers on a 2015 budget widely seen breaking promises to Brussels over deficit cuts.

The reshuffle is the latest episode in a debate in Europe about how much budgets can be cut to reduce debt while the region's economies are still recovering from financial crises.

Valls handed in his government's resignation on Monday after Hollande judged outspoken Economy Minister Arnaud Montebourg had gone too far by attacking his economic recovery plan and crucial euro zone partner Germany's "obsession" with austerity.

While Montebourg's appeals for fiscal loosening aimed at boosting growth have started to gain traction in some quarters outside France, others insist trimming welfare systems and state spending are needed to make economies more competitive.
 


Hollande, who in January took a more pro-business turn, has based his recovery plan around 50 billion euros of spending savings up to the end of his mandate in 2017, while offering companies 40 billion euros in tax cuts to help them hire more.

"The president and the prime minister want to get it wrapped up quickly because the government needs to get down to work," said one source close to Hollande.

"That said, forming a government is never easy."

At stake is the slender majority of Hollande's Socialists in the lower house of parliament which is due to examine the budget bill and other reforms - such as a liberalization of France's highly regulated service sector - in coming weeks.

If around 40 leftist Socialist deputies feel under-represented by the new cabinet, they could abstain or oppose the forthcoming reforms. The downside for them is that, given the unpopularity of the ruling majority, they would likely lose their constituencies if a rebellion triggered new elections.

Luc Chatel, caretaker leader of the main UMP opposition party, called for a vote of confidence on the new government but stopped short of demanding Hollande dissolve parliament.

Aurelie Filippetti, one of three ministers including Montebourg who will exit the government, played down speculation that the group would seek to lure away leftist deputies from the government camp and so undermine Hollande's fragile majority.

"It's not our aim to provoke a government crisis. I will support the new government," the ex-culture minister told BFM-TV, saying she planned to focus her work on the depressed region of northeastern France where she is a Socialist deputy.

The European debate about how to kickstart growth while not undermining public finances is not just felt in France. Austria's finance minister Michael Spindelegger resigned on Tuesday after drawing fire for his refusal to cut taxes unless that can be financed without new levies.
 

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"SAVING PRIVATE HOLLANDE"

While other European economies begin to emerge from a years-long slow-down, France, the euro zone's second-largest economy, is flat and the government has acknowledged it will not meet this year's fiscal targets. Most economists doubt a pledge to bring the deficit within EU-endorsed limits in 2015 will be met.

The latest sign of weakness came from France's depressed real estate sector on Monday, where new housing starts in July registered a 10.8 percent year-on-year fall to hit their lowest level since November 1998.

Euro zone officials have often exchanged fierce words over the extent to which budgetary rigor can be pursued while the region's economies are still recovering from the financial crisis sparked in 2008/09.

Ironically, Montebourg's appeals against "austerity" have started to gain support elsewhere, with European Central bank chief Mario Draghi weighing in last week with a call for governments to do more to push demand.

While Germany's Angela Merkel and her conservatives have yet to comment directly on the French reshuffle, some voices in the German media raised concern that excess rigor would help the rise of the far-right National Front in France.

"The goal in Europe must be: Save Private Hollande. If the President and his new government press ahead with their reform course, then Berlin and Brussels should meet him half way," left-leaning Sueddeutsche Zeitung wrote in an editorial, citing flexibility on public deficit limits.



Economists gave a guarded welcome to Montebourg's eviction, hoping it would bring a sharper focus to government.

"This represents a welcome clarification of the economic strategy but it increases the risk of a political crisis," Barclays economist Philippe Gudin said.

He said the most likely scenario would be for self-proclaimed rebel lawmakers in the ruling Socialist party to keep criticizing Hollande's policies but without forcing snap elections -- if only for fear of losing their own seats.

(Additional reporting by Ingrid Melander in Paris,; Michelle Martin in Berlin and the Vienna bureau; editing by Anna Willard)

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