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MNI (Frankfurt)

A rebound in consumer spending means France's economy may not need an additional stimulus package proposed for later this year, but the government will be on the lookout for labour market bottlenecks, the French Treasury's chief economist told MNI.

France will decide in September whether to boost its EUR100 billion stimulus, and will do so if consumption does not rebound far enough or if the labour market continues to decline, Agnes Benassy-Quere said in an interview, in which she said European Union nations would only gradually be able to reduce excess debtafter the Covid crisis.

"Our baseline is that the economy is going to rebound. Bottlenecks are likely to appear, our priority will be to fix them," Benassy-Quere said, calling talk of additional spending "premature," amid signs the economy could return to pre-crisis activity of before the end of this year. About 35% of the existing EUR100 billion French stimulus has already been allocated.


Possible roadblocks included skills shortages, as well as the over-specialisation which led France's trade performance to deteriorate during the Covid crisis.

"Our priority is also to fix our competitiveness, hence the importance of R&D programmes, but also reforming governance and innovation. We are thinking more long term in order to lift the ceiling of growth," she said.

The reallocation of capital and labour necessary to close the output gap "will not happen overnight", the economist said, pointing to difficulties faced by companies in industries such as construction in finding workers, many of whom may have used successive lockdowns to retrain.

"It shouldn't be taken for granted that the recovery of demand will be matched by unchanged supply capacity," Benassy-Quere said, noting that it "doesn't make sense to stimulate demand in one sector if supply isn't able to follow."

With the European Union later this year set to debate the future of its Stability and Growth Pact, which limits member states' debt to 60% of GDP, Benassy-Quere said trying to bring national balance sheets in line within such strict boundaries in 10 years would be impossible without jeopardising growth. Instead, the aim in a low-interest environment should first be to stabilise, then gradually reduce debts, while avoiding mass bankruptcies by premature withdrawal of Covid support.


European Central Bank bond-buying is helping to suppress debt costs, but eventually monetary policy must normalise, she said.

"Some people are desperate that the central bank hold so much public debt, but the objective of the central bank is a public good – price stability," she said. "More generally, financial and macroeconomic stability is in the interest of the central bank."

If inflation and growth recover in tandem, the market will absorb more government debt and real interest rates will stay below the growth rate, she added.

Benassy-Quere noted that the recent strengthening of the euro against the dollar was diluted by the differential between eurozone and U.S. inflation at a time when the Federal Reserve's new policy framework makes it more tolerant of higher rates of price increases. However, the ECB was also examining its policy settings, she noted.

"Maybe the dollar could be weaker in nominal terms, but not in real terms. So I'm not too worried about the appreciation of the euro, although it depends very much on what's going to happen with the ECB and the strategic review," she said.

MNI Frankfurt Bureau | +49-69-720-146 |
MNI Frankfurt Bureau | +49-69-720-146 |
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