Francois Villeroy de Galhau, Governor of the Bank of France, emphasized the urgent need for the country to address its deficit and debt issues, as bond markets increasingly signal risks. His remarks come amid growing pressure on the French government to present a budget bill for 2025.
Warnings from International Lenders
“In recent days, international lenders are telling us we must now react,” Villeroy stated during an appearance on France 2 television. He noted a significant increase in the interest-rate spread between French and German bonds, which has risen from around 0.5 percentage points to nearly 0.8.
Government’s Fiscal Strategy
The French government is facing mounting pressure to devise rapid solutions to its fiscal challenges. Prime Minister Michel Barnier recently announced plans to increase taxes on the country’s largest companies and wealthiest individuals to help tackle the substantial budget deficit, a strategy that Villeroy supports.
Balanced Approach Required
“When a family is living beyond its means, which is France’s case, you can cut spending or raise revenues,” Villeroy explained. “Today, we need to do both—a well-proportioned cocktail of measures.” He suggested that savings should comprise three-quarters of the fiscal efforts.
Favorable Conditions for Consolidation
Villeroy noted that the current environment is relatively advantageous for fiscal consolidation, citing easing inflation, improving real incomes, and declining interest rates. “For 40 years, we’ve been saying it isn’t the moment and that we mustn’t break growth—the result is that public debt is getting out of hand,” he warned.
Impending EU Compliance Challenges
He also highlighted that France risks becoming the only country in Europe unable to bring its deficit within the EU’s ceiling of 3% of economic output, underscoring the urgency of addressing fiscal issues.
Positive Consumer Confidence Data
In a potential silver lining for Barnier’s new administration, data from the French statistics agency Insee revealed that consumer confidence rose in September to its highest level since February 2022, exceeding economists’ expectations.
Cautious Economic Outlook
However, Insee cautioned that France’s economic growth is expected to be modest in the second half of the year, as consumer demand increases only slightly and businesses remain hesitant to invest due to ongoing political uncertainty.
Conclusion
As France navigates these fiscal challenges, the urgency for a balanced approach to reform is clear. The government’s ability to implement effective measures will be critical in restoring fiscal health and maintaining consumer confidence amidst broader economic uncertainties.
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