The cross : How is the French economy doing today?

François Villeroy de Galhau: After a very brutal plunge in activity of 32% at the end of March, the start of the recovery is rapid. We interviewed thousands of companies of all sizes: the recovery is now better than our forecasts. At the end of June, the decline is still 9% compared to the previousCovid, but our previous forecast was for – 12%.

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In the third quarter, we should have a double-digit rebound in the French economy, of at least 14%. It’s spectacular, but from a weaker base. Getting back to the pre-crisis level will take time. We anticipate a recovery in a “bird’s wing”, rather than in V, with a curve that gradually flattens.

What explains this rapid recovery?

F. V. G. : Massive government measures have absorbed the shock. There were government measures, which helped cushion the shock, with in particular State Guaranteed Loans (PGE), whose envelope could exceed 120 billion by the end of the year, the highest level in Europe. France has succeeded in orienting them at 75% towards SMEs and VSEs, much more than our neighbors.

With the deconfinement, the French then found the way to the stores, also encouraged by certain sectoral measures, as in the automobile. But the economic crisis remains severe, harder than in 2009. It will have significant effects, but shifted over time on employment.

When will we return to the pre-crisis level?

F. V. G. : In mid-2022, according to our central hypothesis, if there is no bad health news. But, in a more favorable scenario, it would be at the end of 2021, if households use “Forced savings” accumulated during this crisis: 65 billion euros at the end of May and probably 100 billion at the end of the year, or 4% to 5% of GDP. This assumes that the French regain enough confidence to consume, which would support growth and employment.

How to restore their confidence?

F. V. G. : Beyond health improvement, there are three key economic elements. First, a guarantee of fiscal stability, as Roosevelt did in the United States in 1933: no tax increase, no decrease, because, let’s be clear, we can’t afford it. We must then reassure by maintaining significant unemployment compensation: one of the reasons that can lead the French to increase their precautionary savings is the fear of unemployment, which will unfortunately increase. Insecurity about future pensions could also fuel this savings.

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The third important point is access to employment itself. There is no stronger and fairer reform in the face of inequalities than those in favor of apprenticeship, vocational training and education: we have made progress in recent years, let’s continue! Today, there are more apprentices in Germany than in France, Italy and Spain combined, countries where the youth unemployment rate is three times higher. It is not a coincidence.

The reforms of unemployment insurance and retreats should therefore be abandoned?

F. V. G. : I do not say that ; it is up to government and social dialogue to decide. But our social solidarity – which must be sustainably funded – is today a favorable element for economic confidence and recovery.

The State emerges even more indebted from this crisis …

F. V. G. : It is important to have a clear debt strategy. It will be at least 120% of GDP at the end of 2020, 20% more than at the end of 2019. The increase this year is justified, but the long trend is not: it is twice as much as ‘twenty years ago. At the time we had the same level of debt as Germany. Since the 2009 crisis, Germany has reduced its debt. Ours unfortunately continued to grow.

We could limit the “Covid debt” and only start to pay it off in ten years. But, when the recovery is solid, within a year or two, it will be all the more important to reduce the “ordinary” debt, 100% of GDP. Growth will help, but we will also have to finally control our public spending: it is significantly higher than our European neighbors, around 55% of GDP (excluding the Covid effect) against 45%, while they have the same model social than us.

If we continue to grow our spending at the past rate, 1% per year, we will not reduce this ordinary debt. Conversely, if we simply stabilize our spending in volume terms, we can reduce the “non-covid” debt from 100% to 80% in a decade. That would change everything, on the heaviness of the “backpack” that we transmit to young people: it is a key question of solidarity between generations.

The government is preparing a stimulus package for the start of the school year. What do you expect?

F. V. G. : The state provided an effective shield in the spring. But in reconstruction, it cannot do everything: public money has its limits, and it is our money! Even more than stimulus measures, the French economy needs a confidence pact, with private actors. After households, let’s talk about companies: one of the priorities is to strengthen their equity. We estimate the public investment needs there between 10 and 20 billion euros. They would concern more than a hundred mid-sized companies, around 10,000 SMEs and over 100,000 VSEs, economically viable but financially weakened. This mobilization, in the form of quasi-equity without voting rights, should be done with private investors, called to take a share of the risk and helping to choose viable companies.

Did the European institutions rise to the occasion during this crisis?

F. V. G. : Monetary policy helped prevent a financial crisis, with a credit crunch, from adding to the health and economic crisis. The European Central Bank reacted in March with its interest rates which are the lowest in the world, and by further increasing the volumes of financing available to businesses. We will continue as long as necessary, given that inflation is too low at 0.3% today.

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To this is now added the hope of a European budgetary policy, up to 750 billion euros. It is a historic turning point, thanks to the Franco-German agreement of May. We, the central bankers, have been saying for years that monetary policy cannot act alone.

It is also the lever to finance our common challenges of ecological transition and digital transition. If we play collectively, in France as in Europe, then this severe crisis can also be our chance.