(Bloomberg) -- Bank of France Governor Francois Villeroy de Galhau said the government must be as ambitious as possible with budget cuts to tackle the “chronic sickness” of the country’s public finances and restore economic confidence after months of political upheaval.
France’s debt levels have broken through several “critical thresholds” and its deficit this year will be the largest in the euro zone, the central bank chief said in new year address attended by Finance Minister Eric Lombard.
Villeroy also warned that sell-offs of French assets amid political and budget uncertainty have driven borrowing costs relative to Germany’s “dangerously” higher and the cost of financing public debt will surpass the education budget.
“The gravity of our budgetary situation at least has one virtue: our country no longer has to choose between repairing finances and economic growth,” Villeroy said. “Reducing budgetary and tax uncertainty, which is weighing on businesses and households, has now become a condition for confidence and therefore growth.”
France is in the midst of a prolonged political crisis over its 2025 financial plans that triggered government collapse last month and has left the state reliant on emergency legislation to keep functioning.
Lombard, who was appointed late December, is negotiating with parties this week to piece together a new budget for 2025 that could pass the scrutiny of a National Assembly where there is no clear majority. The main details are set to be outlined by Prime Minister Francois Bayrou in a Jan. 14 policy speech.
The previous government of Michel Barnier was toppled earlier last month in a no-confidence vote when he tried to push through a plan for a sharp reduction in the deficit to 5% of economic output from around 6.1% in 2024.
In an effort to appease opposition lawmakers and safeguard economic growth, Lombard said earlier this week that the government will target a gap between 5% and 5.5% this year. Villeroy, who has advised the new government on fiscal policy, said that to ensure credibility, it’s necessary to get as close to 5% as possible and be “clearly below 5.5.%.”
Villeroy also said there are downside risks to the Bank of France’s forecast of 0.9% economic growth this year. Still, the institution doesn’t currently predict a recession, he added.
“There are objective reasons for collective gloom, but it shouldn’t lead to excessive pessimism,” Villeroy said.
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