(Bloomberg) -- The European Central Bank must guide investors that policymakers won’t easily come to the rescue of France in the event of financial-market stress, according to former Chief Economist Peter Praet.

Officials face “a test of fiscal dominance” that will determine their resolve to support budget discipline in the euro area, and they’ll be worried about how that will play out, the Belgian told Guy Johnson and Kriti Gupta on Bloomberg Television. 

“The markets are expecting probably a little bit too much from central bankers at this stage, so I think they should be tough,” Praet said. “The bar must be very high.”

Praet, whose eight-year stint at the ECB until 2019 spanned much of the region’s sovereign-debt crisis, spoke in the week that French voters go to the polls for a runoff to choose a new National Assembly. Last month’s announcement of that election sparked concern among investors that the outcome would erode efforts to fix the public finances. 

Until now, ECB officials have mainly observed that the widening of the spread of French bonds over German equivalents is orderly, while President Christine Lagarde repeated this week that policymakers will stay “attentive” because “price stability is obviously relying on financial stability.”

“I think it’s totally true,” Praet said, referencing her remarks. “At the same time, one should also say that markets should not expect interventions of the central bank so easily. So they should keep a lot of ambiguity, at least for the time being.”

  • Sign up for the Paris Edition newsletter for special coverage throughout the French election.

While the experience of the sovereign-debt crisis and the pandemic means the ECB now has an arsenal of options to deal with moments of market stress, it should lean away from actually using them, said Jumana Saleheen, chief European economist at Vanguard Asset Services.

“Ten years on now, there’s a lot more tools, they made those much more explicit, there’s precedence in the use of those tools,” she told Francine Lacqua in a separate interview. Even so, “it’s not ideal, right? You want the free market to work, you want to intervene only if you have to.”

Praet joined other observers in saying that relief shown by investors this week at the prospect of a hung parliament in France may not be justified. He said financial markets are “too lenient,” and that’s breeding complacency within France.

“People would love to get 70 basis points of extra spreads compared to the bund without tail risks, with the expectation that if really things go wrong, the central banks would intervene,” he said. “This sort of moral hazard is I would say unacceptable and I personally think that markets are a bit too optimistic about the situation in the transition to the presidential elections.”

The ECB president shouldn’t return to France to lead a government there, Praet added. 

“Christine Lagarde should finish the job,” he said. “I don’t think, in the present environment of strong populism in France, that putting someone with a technocratic image, a central banker coming in — I don’t think that would be a good idea.”

--With assistance from Jana Randow and Marilen Martin.

(Updates with economist starting in seventh paragraph.)

©2024 Bloomberg L.P.