France’s finance minister on Tuesday hinted that the country’s much-vaunted aim to cut 21 billion euros ($28 billion) in public spending next year could be in jeopardy due to low inflation.
“We can’t have the same targets with an inflation that is becoming very low,” Michel Sapin told AFP in an interview, in response to a question on whether the 2015 savings target would be maintained.
France has promised to get its public deficit down to the European Union ceiling of three percent of gross domestic product next year but this looks increasingly difficult given stagnant growth in the eurozone’s second largest economy.
France’s government has predicted a deficit of “around four percent” of gross domestic product this year, an upwards revision from the 3.8 percent forecast previously.
Sapin said the EU rules should take into account what he called the “shock” of low inflation in the 18-country eurozone, which was 0.3 percent in August.
Currently the EU treaties allow a certain flexibility for countries trying to reduce their deficits if they are struggling with a period of slow growth, but Sapin said low inflation should also be taken into account.
“Up until now, the tendency was to reason in terms of growth. The texts (of the treaty) allow flexibility in the case of recession or persistently very low growth but now we have another factor which ends up being as destructive for budgets as low growth and that’s low inflation,” said Sapin.
The low inflation rate in the eurozone “should very quickly be taken into account and we need decisions to be taken” at the European level, he said.
Like in the wider eurozone, inflation in France is also extremely low — at 0.5 percent in July.
The fact that prices are rising slowly sounds on the face of it a good thing for consumers and the economy but actually encourages shoppers to put off purchases in the hope of getting even better bargains.
This depresses consumer demand and, by extension, economic growth.
The European Central Bank aims at keeping inflation “close to, but below” two percent, considered to be the right level for a healthy economy.