ECB’s Villeroy: Must Always Avoid a Possible Return of Inflation

11 March 2021

By David Barwick – FRANKFURT (Econostream) – A central bank must always be on guard against the ‘disease’ of inflation, European Central Bank Governing Council member François Villeroy de Galhau said Thursday.

In an interview with French weekly news magazine Pèlerin, Villeroy, who heads the Bank of France, said that the French economy would expand by 5% this year and return to pre-Covid output levels by the middle of 2022.

The pandemic-related increase in French public debt from 100% to 120% of GDP was warranted by circumstances and cancelling it ‘would be incompatible with the euro, and would simply transfer the loss to the accounts of the Banque de France’, he said. ‘So nothing would be gained.’

Villeroy proposed that by following a ‘ten-year debt reduction course’ in tandem with economic growth and more efficient public spending, France could handle the debt. He noted that ‘France holds the world record for public spending, with 55.6% of GDP’ and urged a limit of 0.5% growth per year as opposed to the current annual rate of increase of 1%.

As for taxes, the system ‘changes far too often in France’, he said. The government was too quick to increase taxes after the great financial crisis, hampering the recovery, he said. ‘This mistake must be avoided as we emerge from the current crisis. But let's also stop making unfunded tax cuts, which increase deficits and debt.’

The current absence of inflation does not make indebtedness unproblematic, he said. ‘A central bank must always be careful to avoid a possible return of inflation, because that is how it protects public confidence in the currency. Inflation would be a serious economic and social disease: a melting currency always penalises the weakest in the end, as we have seen in Lebanon and Argentina, for example.’