François Villeroy de Galhau: Anatomy of a fall in inflation - from a successful first phase to the conditions for a controlled landing

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at Paris-Dauphine University, Paris, 28 March 2024. 

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

Introduction

This is the fourth time I have had the pleasure of being invited to speak at Dauphine University and I would like to thank Elyès Jouini. But this is the first time that I will speak after Jean-David Levitte and his remarkable talk on current geopolitical conflicts. This order already highlights the essential: we the central bankers are "only" in charge of the monetary and financial responses, but we are obviously exposed to all of this world of issues and tensions.
 
First, a few words about the strains on France's public finances. Obviously, the current deterioration does not mean that France is bankrupt, but it does highlight at least two imperatives. The first is to confront the truth and to demonstrate credibility: for the past fifteen years, our country and its successive governments have never stuck to our multi-annual commitments to reform. The second imperative, before taking any potentially necessary decisions on taxation, is to finally get to grips with expenditure. I am a great believer in the European social model, but here in France it costs us around 10 GDP points more than our neighbours. And the last few years have done nothing to reduce the gap: once we got over the "bump" of exceptional support related to Covid and energy, our total government expenditure as a percentage of GDP rose when compared with 2019. In volume terms, excluding the effect of this exceptional expenditure, it could increase by more than 2% in  2024. It is high time, not to decree austerity and a general reduction in spending, but to stabilise expenditure in overall volume terms. This assumes an effort in terms of priorities and efficiency that is fair and shared by everyone – not just the State, but local authorities and social services as well. 

To come back to the challenge for central banks, the succession of two shocks as rare and as opposed in terms of economic impact as the pandemic – which was deflationary – followed by the Russian invasion of Ukraine – which was inflationary – was (i) absolutely unprecedented, (ii) massive in scale, (iii) both very rapid and partly temporary.