The aid deployed by the government to fight inflation must remain temporary and targeted in a context of already high indebtedness, warned the Governor of the Banque de France on Thursday, recalling the role of the European Central Bank (ECB) in controlling rising prices.
Government measures have a significant budgetary cost and they should as much as possible remain temporary and targeted, says Franois Villeroy de Galhau, in his traditional letter to the President – sent to the Presidents of the Republic, of the National Assembly and of the Senate -, entitled this year How to reduce inflation?.
This year, we did not hesitate long on the theme of the letter because inflation is what worries the French the most, commented Thursday the Governor of the Banque de France during a press conference.
First of external origin – the rise in the prices of energy and raw materials -, inflation, which reached 6.5% in June in France on the basis of the HICP index used to compare the countries Europeans, is now internal, since inflation excluding energy and food also reached 3.3% in France (3.7% in the euro zone), notes Mr. Villeroy de Galhau in his letter.
This situation has led the ECB to begin the normalization of its monetary policy, with interest rate hikes planned in the coming months to bring inflation back to around 2% in 2024, recalls the governor. In the absence of a new energy shock, the normalization phase will not cause a recession, the real rates – deducting expected inflation – remaining very favourable, wants to reassure the governor.
On the side of public debt, however, the illusion of spending without cost and without limits is over, he adds, believing that France must regain control of its public debt, while public debt reached 112.5% end of 2021.
The economic shock resulting from the war in Ukraine in no way justifies a new + whatever the odds +, faced with the limited reduction in corporate margins and the slowdown for a time in household purchasing power, insists the governor, who underlines the need to ensure the fate of the most disadvantaged households.
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And the Governor of the Banque de France relativizes this decline in purchasing power, expected to be 1% in 2022, because it follows years of continuous increase since 2013.
We have neither the need nor the means to have massive budgetary support, because public debt is now more expensive, he said.
In order to support growth and reduce inflation, he advocates measures to beef up our productive capacity, rather than policies to support demand.
In addition to the ecological and digital transition, France’s particular challenge is also to increase the labor supply, he notes, by accelerating learning and having more seniors at work with a reform of fair pensions, and a real commitment from employers.