Deficit above 5% risks France's fiscal stability, warns Villeroy de Galhau
Banque de France Governor François Villeroy de Galhau warned that a public deficit exceeding 5 percent of GDP in 2026 would put France at fiscal risk. In an interview with Le Figaro, he stressed the imperative of fiscal consolidation to stabilize the debt-to-GDP ratio.
The imperative of fiscal consolidation
Villeroy de Galhau emphasized the critical need for France to reduce its public deficit from an estimated 5.4 percent of GDP in 2025 to 3 percent by 2029. He argued that a deficit above 5 percent in 2026 would expose France to significant risks, including the relaunch of the European excessive deficit procedure, further credit rating downgrades, and the withdrawal of volatile investors.
The Governor highlighted that approximately EUR 7 billion more is consumed annually by interest payments on the national debt, diverting funds from essential areas like education and security.
He advocated for a focus on public spending flexibility rather than further tax increases, noting that France's overall public spending is higher than its European neighbors.
Growth resilience and monetary policy alignment
Despite gathering dark clouds from US customs duties, Chinese competition, and rising bankruptcies, the Banque de France has raised its growth forecast for 2025 and 2026. Villeroy de Galhau attributed this resilience to entrepreneurs and the French people, alongside a slightly less unfavorable international context.
However, he noted that political uncertainty is reducing growth by at least 0.2 percentage points.
Regarding monetary policy, the Governor expressed comfort with the ECB's decision to keep rates unchanged, noting that euro area inflation is close to the 2 percent target.
He dismissed concerns about a decoupling from the Fed, highlighting that European rates, at 2 percent, are already significantly lower than US rates (3.6 percent) and UK rates (3.75 percent).
A generational fiscal burden
The Governor's strong warning on fiscal discipline underscores a critical juncture for France's economic future.
His critique of the pension reform's suspension as a 'gerontocratic social budget' highlights a concerning trend of prioritizing current generations over future fiscal health.
Delaying necessary spending reforms risks compounding the debt burden, making the eventual adjustment even more painful and politically challenging for future leaders.