France’s finance minister on how to fight inflation and preserve stability

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“Fiscal and monetary policies should be consistent,” argues France’s finance minister. “Central banks’ restrictive policies are ineffective if public finances continue to expand”

end of 2021, European countries have been facing inflation. Mostly it has been driven by surging energy prices. This challenge had long been unfamiliar to citizens, economists and finance ministers. It is new for us and a matter of great concern. Inflation is an insidious poison. It can trigger economic recession or social unrest, or even spark a political crisis.

First, fiscal and monetary policies should be consistent. Central banks’ restrictive policies are ineffective if public finances continue to expand. That is why the burden of higher energy prices must be shared among households, businesses and governments. France has put in place an “energy shield” for households, which will cap price rises at 15% in early 2023.

Money is no longer interest-free in the new financial landscape. Rates on French ten-year government bonds, negative 18 months ago, have risen to more than 2.5%, which leads to billions of euros of additional fiscal expenditure. If European governments fail to anticipate higher debt-servicing costs, an inflationary crisis can suddenly become a financial one. Recent turbulence in British bond markets demonstrates the impact of a rapid rate surge.

Our strategy’s second cornerstone is energy independence, because it will facilitate a cut in energy prices. The current crisis is resulting in a massive transfer of wealth from the European Union to hydrocarbon-producing countries. High prices for energy also undermine efforts to build up a strong industrial market.

 

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Britain take note !

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