You are on RMC and BFM TV. Good morning François Villeroy de Galhau. Good morning. Thank you for answering my questions this morning. You are the Governor of the Bank of France and have been since 2015, for another month. You have a lot of perspective on the French economy now. We'll come back to that, but nothing is going right, we can say, for the French economy. INSEE has confirmed what everyone already suspected. The French economy is literally at a standstill. Zero growth for the first months of the year. And today you are addressing the President, since you are sending him your last health bulletin on the French economy, the annual letter. To the President of the Republic, we'll come back to that, but how are you doing, doctor?
Well, it's mainly the uncertainty, Apolline de Malherbe. I wouldn't say nothing is going right. I would say that today we are facing an unprecedented shock, this conflict in Iran, the closure of the Strait of Hormuz, the obvious rise in energy prices, and we don't know exactly what the economic effects will be because we don't know how long this conflict will last. That depends on the American strategy, notably, which is very unpredictable. And so we published three different scenarios in March. The effects are all in the same direction, unfortunately, meaning more inflation, less growth.
But to a greater or lesser extent?
Exactly. The magnitude of the effects depends on the scenario we find ourselves in.
In the worst case, what is it? In the best case, what is it? In terms of growth?
First, what we said in March, and what I repeat this morning, is that we shouldn't bet everything on the most favorable scenario, the one we called the baseline. There is also an unfavorable scenario, and then a very unfavorable scenario. In the worst case, to answer your question, we first have a surge in inflation in 2026, this year. So inflation, according to the scenarios, would be between a little less than 2% on average for the year, or more than 3%. But then, inflation would return towards the 2% target.
When you say 'then', that means after a year?
That means 2027-2028, the exact duration depends on the scenario we are in. It depends on how much the price of oil rises and for how long.
But wait, let me stop you for a moment. Already, that means the floor is higher than the forecast you had made, since initially we had bet on 1.8% inflation, I believe, for the year. And you say it will be at least 2%?
No, no, we had less than that for France, because that is one of France's strengths, we must also be lucid about our strengths. We have them, of course, our inflation is low, it's even the lowest in the euro area. So we started from an inflation that was around... We should go towards 2% this year, perhaps more if we are in the unfavorable scenarios, but then we return towards 2%.
And the other question is growth.
So in all the scenarios we publish, we would still have positive growth this year. So we are between 0.9 in the most favorable case or 0.3 in the most unfavorable case. We'll see. And France would avoid recession. So that's the less bad news, now we're not going to kid ourselves. This shock coming from the outside is obviously a negative element, not only for the French economy, for the European economy and the global economy.
You say the word shock, we'll come back to that. Oil shock or not? What should we understand? But let me stop for a moment on this growth forecast. I remind you that the budget we are currently under was made with a growth forecast of 0.8, then 1, which was revised down to 0.8. And basically, what we hear in what you are telling us is that 0.9 is the most optimistic scenario.
It's probably the favorable scenario. I think it's too early to say what it will mean for the budget. You know the government's objective is a deficit of 5% this year. It's not an enormous effort compared to last year, since we ended at 5.1%. But sorry, it wasn't already an enormous effort, but in a context where we were hoping for growth. I think we must stick to this 5%. The government has also announced savings measures on other, less priority spending. And if you allow me to extend on the budget, it's part of the concerns of the French people. The debt which is much too high. We must have the objective of returning to a 3% deficit by 2029. It's our European commitment, but above all this figure of 3%, it's not magic. It's the one that would finally allow us to reduce the weight of debt relative to GDP, relative to the size of the French economy.
I don't believe it. I think it's a necessity. When we look more broadly at what we do in this letter to the President of the Republic, France has more deficits than its neighbors, more debt. Why? Because it has more public spending. We have roughly the same European social model as our neighbors. I believe in it, it's a good social model. Simply, it costs us much more than the others. So we must make an effort on the efficiency of all our spending.
And that means we will also have to make some sacrifices?
That means we will have to make choices. In any case, we cannot finance everything. And let's look at our European neighbors. You know, they have the same policies as us and often, they achieve better results by spending less. That is very practical. It's not political or ideological.
You spoke of a shock. You said the word 'shock' several times. Would you also say 'oil shock'? The oil shock brings to mind for the venerable of my generation, Apolline, the 70s when we experienced in 1973 then in 1979 very strong and very lasting increases in oil prices. Today we are not there obviously. The longer things go on, the closer we get to an oil shock, but it will all depend on the duration of the conflict and therefore on political variables.
An oil shock. That is to say that indeed, we are today on the 66th day of war.
Michel-Édouard Leclerc for example says it won't be soon that we find the prices from before. Can we even imagine that the current fuel prices could become the new normal?
I will tell you simply, I don't know.
Sorry, but what are you for then?
No, if you know, Apolline de Malherbe, how to predict the future with certainty, in this world where we live, you are extremely strong. What I know is that we publish three different scenarios and in at least two of the three scenarios, the price of oil falls back by the end of the year and for next year we will see. I believe nonetheless that in any case, this is a very important message from us: we must obviously accelerate the energy transition, that is the answer. We cannot live with every five years, every ten years, a crisis in the Middle East or an oil crisis linked to the invasion of Ukraine that holds our economy hostage. So we must reduce our dependence. That means clean energy, it's also good for the climate. It happens that France is rather ahead on this thanks to nuclear energy, but we must obviously go further in this direction. Beyond very short-term responses, we must set ourselves goals.
