The French government faces a critical juncture, demanding ambitious budget cuts to address its escalating public debt and restore economic confidence amidst political turmoil. Bank of France Governor Francois Villeroy de Galhau stressed the urgency of the situation, emphasizing the need for decisive action to combat the nation’s “chronic sickness” of unsustainable public finances.
France’s debt has surpassed crucial thresholds, and its projected 2025 deficit is set to be the euro zone’s largest. This precarious financial position, coupled with political instability following the recent government collapse, has triggered sell-offs of French assets, widening the gap in borrowing costs compared to Germany. Villeroy warned that these escalating borrowing costs could soon outstrip the nation’s education budget, highlighting the severity of the crisis.
The central bank chief, speaking at a New Year’s address attended by Finance Minister Eric Lombard, argued that addressing the budgetary crisis is now a prerequisite for economic growth. By reducing fiscal uncertainty, the government can restore confidence among businesses and households, fostering a more conducive environment for investment and economic expansion.
France is grappling with the aftermath of a political crisis sparked by its 2025 budget plans. The collapse of Michel Barnier’s government last month, following a failed attempt to drastically reduce the deficit to 5% of GDP from approximately 6.1% in 2024, underscored the deep divisions over fiscal policy. The country is currently operating under emergency legislation, highlighting the urgent need for a stable government and a viable budget.
Newly appointed Finance Minister Lombard is engaged in intense negotiations with various political parties to forge a new budget for 2025 that can secure parliamentary approval in a fragmented National Assembly. Prime Minister Francois Bayrou is expected to unveil the key details of the budget plan in a policy speech scheduled for January 14th.
In an attempt to balance fiscal consolidation with economic growth, Lombard indicated earlier this week that the government aims to achieve a deficit between 5% and 5.5% of GDP this year. Villeroy, who has been advising the new government on fiscal matters, stressed the importance of achieving a deficit as close to 5% as possible, and “clearly below 5.5%,” to maintain credibility with investors and markets.
The Bank of France projects 0.9% economic growth for 2025, but Villeroy cautioned about downside risks. Despite acknowledging valid reasons for concern, he urged against excessive pessimism, maintaining that the institution does not currently foresee a recession. France’s ability to navigate this complex fiscal and political landscape will be crucial for its economic future.
