To reduce inflation and further economic growth, the government must end the generous spending policy it adopted since the start of the COVID-19 pandemic, Central Bank Governor François Villeroy de Galhau wrote in a letter to President Emmanuel Macron that was made public on Monday.

All efforts must be invested in cutting back inflation, this “social and economic disease” which is spreading to goods and services beyond food and energy, Villeroy de Galhau wrote.

An ambitious monetary policy and several critical structural reforms are necessary to bring inflationary pressures down to “under 2%”, which the Central Bank expects to reach anywhere between the “end of 2024 and end of 2025”.

The general price rise, initially caused by severe COVID-19-related supply disruptions and an energy crisis that followed Russia’s invasion of Ukraine, is now spreading to goods and services beyond energy and food as high production costs trickle down to final prices.

Villeroy de Galhau has thus urged the government to end its “whatever it takes” spending policy to counteract the worst economic effects of the pandemic, which, in three years, ensured public expenditures exploded by €240 billion or 10% of the French GDP.

The €24 billion ‘price shield’ France introduced after Ukraine’s invasion in 2022 to provide blanket support to all French households proved successful in keeping French inflationary levels to the lowest levels among eurozone members. However, it is no longer deemed necessary, as debt and deficit levels are going through the roof.

According to Villeroy de Galhau, such measures must be tailored to the poorest sections of society.

“Our yearly deficit is due to be one of the highest in the EU”, the letter warned, while government debt stands at 111.6% of GDP, according to the Economy Ministry’s latest estimates published last week – way above the approximately 90% Euro area average, and budget rules’ 60% debt ceiling.

On top of a hawkish monetary policy, which has seen the European Central Bank (ECB) increase interest rates five-fold in the past year, Villeroy de Galhau encouraged France, alongside its European counterparts, to successfully transition in both the energy and digital realms and liberalise the labour market to expand production capacities and further economic growth, all the while reducing inflation.

Last week, Economy Minister Bruno Le Maire announced that the government would enter an “accelerated” debt-reduction programme to reduce public debt from 111.6% to 108.3% of GDP by 2027 that aims to give France “leeway” to face future economic crises better. Opposition parties have warned that this marked the start of a new wave of austerity.

A proposal to reform the Growth and Stability Pact will be published by the European Commission on Wednesday. The 3%/GDP deficit and 60%/GDP debt rules are expected to remain, though country-specific plans for debt reduction should be introduced.

(Theo Bourgery-Gonse | EURACTIV.fr)

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