The European Central Bank’s (ECB) interest rate cuts will pave the way for France to implement much-needed budget tightening measures, the Governor of the Bank of France, Francois Villeroy de Galhau, announced on Monday, as cited by Reuters.
This comes in response to warnings from France’s independent fiscal watchdog that the government must undertake unprecedented budget tightening to adhere to Paris’ plans to reduce its deficit to 3 per cent of output by 2027.
Despite concerns from some economists that such tightening, potentially amounting to 50 billion euros ($53 billion) over the period, could impact growth and the budget deficit, Villeroy remains optimistic. He stated, “The times are not unfavourable for carrying out budget consolidation.”
The Bank of France anticipates a robust economic recovery in 2025–2026, driven by lower inflation that enhances consumers’ purchasing power and stimulates household spending growth. Concurrently, interest rate cuts are expected to encourage investment.
Villeroy emphasised that the easing of monetary policy creates favourable conditions for budget consolidation. He presented these views at a news conference where he delivered an annual report on the French economy to President Emmanuel Macron.
As inflation trends towards its 2 per cent target, the ECB has indicated a first rate cut in June, a move Villeroy has consistently advocated to be followed by others on a gradual and pragmatic basis.
While Villeroy stressed that France’s budget tightening should prioritise controlling spending, he also highlighted the need for the government to consider boosting tax income by reducing some of the 80 billion euros in tax breaks available to households and firms.
Despite the government’s current stance on no-new taxes, it is contemplating targeted levies such as a tax on energy companies’ outsized profits and corporate share buybacks.
