François Villeroy de Galhau: The sustainability of French debt, between rising interest rates and European rules

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Conference of the Haut Conseil des Finances Publiques, Paris, 10 May 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Ladies and Gentlemen,

It is a pleasure to be with you today, and I thank the first President Pierre Moscovici for inviting a central banker to conclude this predominantly fiscal conference. I am especially aware of this privilege because monetary policy and its relationship with fiscal policy are often subject to two suspicions. Firstly, accommodative monetary policy is believed to be responsible for the rise in public debt. This is not true: the unconventional policies conducted over the past decade to support inflation (and activity), which was weak at the time, have merely had the effect of reducing the cost of debt. Several countries, not only Germany, have, on the contrary, taken advantage of this decade to bring down their debt. And unfortunately we have to acknowledge that in France, government spending was already systematically higher than revenues long before the low interest rates and government securities purchases.

The second suspicion is that because of this high public debt, monetary policy is now unable to raise interest rates sufficiently to combat renewed inflation. This is also untrue: the independence of the European Central Bank and of each national central bank, starting with the Banque de France, is notably designed to prevent any risk of "fiscal domination". Our Governing Council will do whatever it takes to fulfil our primary price stability mandate; have no doubt about that. It is therefore particularly important for the fiscal authorities to ensure debt sustainability in a context of rising interest rates. It is an understatement to say that this issue was far from dominating the French election campaign, so I will first develop the reasons why debt must remain a key issue (I), before discussing possible fiscal rules – including European ones (II).