Bank of France Governor Francois Villeroy de Galhau told President Emmanuel Macron that high levels of state spending can’t tame inflation, which is primarily the responsibility of the central bank.
In an annual letter to the French leader, Villeroy said measures taken to mitigate surging natural gas and electricity prices — costing about €50 billion ($55.1 billion) in 2022 and 2023 — must be better targeted toward those in need, and then withdrawn within two years.
With France’s debt higher and the budget deficit wider than expected before the energy crisis, he also said the government must stop cutting taxes — unless it has other ways to finance revenue shortfalls.
“The fiscal remedy can only bring temporary relief,” Villeroy wrote. “Fiscal-support measures can even exacerbate inflationary tensions in the medium term, which would require a stronger monetary-policy response.”
The European Central Bank, where Villeroy is a member of the Governing Council, has repeatedly cautioned governments to wind down fiscal support as it lifts interest rates at a record pace to combat inflation.
France is among the countries to have spent the most and in the least targeted way. About 80% of aid last year was disbursed indiscriminately, according to Villeroy.
Finance Minister Bruno Le Maire said last week that the mechanism limiting natural gas prices would end as wholesale costs ease, but a so-called electricity-price shield may stay in place for two more years so as not to worry consumers.
Villeroy said in his letter that monetary policy should play the primary role in defeating the strongest inflation of the euro era — particularly as it’s more effective at tackling underlying price pressures that risk being more persistent.
But he said it may yet take some time to see the effect of hikes to date due to delays in their transmission to the wider economy.
“The sprint of rate hikes in 2022 has become a long-distance race and duration will from now on count more than the level,” Villeroy said.
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