The French economy is still immersed in a thick fog. More than a year after the outbreak of the conflict in Ukraine, the macroeconomic indicators are far from having all turned green. Tricolor growth in gross domestic product (GDP) continues to accelerate modestly by 0.1% in the first quarter and 0.2% in the second quarter according to the last note of the INSEE economic situation. In the euro zone, the economic engines in the major powers are running at low speed.
Soaring prices have put pressure on households and businesses in many European states already shaken by the long years of the pandemic. “Inflation dynamics are central to our scenario as they reflect rising energy and food prices and tighter monetary policies”, said the economist of the French Observatory of Economic Conditions (OFCE), Christophe Blot, during a recent meeting with journalists. In this tense context, the Governor of the Banque de France, François Villeroy de Galhau, sent his traditional letter to the President of the Republic Emmanuel Macron this Monday, April 24 on the theme “How the France and Europe will defeat inflation”. It is a republican tradition since 1945. It is also addressed to the presidency of the National Assembly and to the Senate. In his speech, the central banker unrolled a list of remedies against inflation considered “an economic and social disease”.
Inflation at 4% at the end of 2023
Inflation in France and Europe “changed in character”. “It started with a supply shock and then continued with the shock caused by the war. This inflation spread to the prices of services and all other goods.said François Villeroy de Galhau during a press briefing.
As a reminder, the consumer price index peaked at 5.7% in March and at 6.7% for the harmonized index in the euro zone. He pointed out the risks “persistent inflation”. The prices of goods and services, which make up underlying inflation, represent nearly 70% of the consumer basket in France.
Conversely, energy and food prices represent 30% of the average basket. Banque de France economists expect inflation to peak in the first half of the year and inflation at 4% by the end of 2023. “It would decline more sharply in 2024 around 2.5% and around 2% in 2025. The monetary policy transmission lag is around two years”added François Villeroy de Galhau.
End unfunded tax cuts
Emmanuel Macron has emphasized lower taxes in his economic policy since his first term. Between the abolition of wealth tax and its transformation into real estate wealth tax (IFI), the reduction in corporate tax (from 33% to 25%) and production taxes, the end of the housing tax, audiovisual levy, the Head of State has multiplied his gestures towards businesses and households.
But these sometimes unfunded choices have repercussions on public finances. It is “stabilize taxation by stopping unfunded tax cuts. Fiscal stability gives visibility to economic actors, i.e. companies and households”said François Villeroy de Galhau.
This recommendation risks making Bercy cringe. Last week, the Ministers of Economy and Public Accounts, Bruno Le Maire and Gabriel Attal reaffirmed, during the presentation of the stability program sent to Brussels for the period 2023-2027, their desire to continue lowering taxes until at the end of the quinquennium.
On the other hand, Bercy announced that he wanted to continue to close the tap of aid “whatever the cost” to “accelerate the deleveraging of France”. This should satisfy the Governor of the Banque de France. The latter argues that “the response to inflation is more monetary than budgetary. The budget tool has time limits. Always and everywhere, the weapon of interest rates has always been effective in combating underlying inflation.. The Banque de France believes that the tightening of the ECB’s monetary policy will not cause a “recession” in the euro zone.
A program of structural reforms on energy, digital, public services and labor
During the press briefing, the Governor of the Banque de France urged the government to extend “structural reforms”. Among the levers mentioned by the Tricolor Central Bank is first and foremost the energy and climate transformation “in order to reduce our dependence”. The former managing director of BNP Paribas also spoke about the digital transformation of the economy. He also pointed to the crisis in public services, “not always attributable to a lack of means”. “There is a public management issue (autonomy of managers, recruitment of public officials). There is also an issue of the quality and efficiency of spending,” struck François Villeroy de Galhau.
With regard to work, France is still suffering “double jeopardy”. “Many companies are having difficulty recruiting when we are still far from full employment”. Employment problems are concentrated “at both ends of the demographic spectrum”. It’s necessary “increase the employment of young people and seniors (successful apprenticeship), lead the battle for skills (national education, improvements in the vocational training offer), and strengthen the attractiveness of work (teleworking, autonomy, sense of and mobility)”, considers François Villeroy de Galhau. In the midst of a debate on the labor law currently being prepared by the government, the Banque de France hopes to be heard after the long months of social crisis on pension reform.
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