France is ‘putting the house in order’ and can slash deficit to 3% in three years, central bank governor tells CNBC

Key points

• Banque de France Governor Emmanuel Moulin says France can cut its deficit to 3% by 2029.
• France's deficit was 5.1% of GDP last year, and the EU has recommended bringing it closer to 3%.
• Moulin attributes rising French bond yields to political uncertainty, not a change in fiscal position.

France's central bank governor told CNBC that the country is "putting the house in order" and can reduce its budget deficit to 3% of GDP within three years. Banque de France Governor Emmanuel Moulin made the comments to CNBC's JP Ong on the sidelines of the IMF Meetings in Bangkok.

France is under the EU's excessive deficit procedure, with the bloc recommending Paris bring its deficit closer to 3% of GDP. The deficit stood at 5.1% last year. Market concerns about political instability have weighed on French bond markets this year.

Moulin on market pressure

Moulin said he did not believe rising government borrowing costs in recent months reflected a change in France's fiscal position. He attributed the increase to political uncertainty and the question of whether the budget will be adopted with a 5% deficit, which he said is the government's objective.

He said that to reassure markets, it is important that a budget is voted and sticks to the 5% deficit. He noted that past French governments had successfully consolidated public finances and drastically cut deficits, but said it is more difficult today because of the cost of servicing the national debt.

This is not austerity. It is just putting the house in order.

— Emmanuel Moulin

Deficit target and austerity

Moulin said it is possible to get back to a 3% deficit in 2029, which he said is the government's objective. Asked whether that could be achieved without austerity, he said he did not think such a policy mix was in the cards.

He rejected the austerity label, saying, "This is not austerity. It is just putting the house in order." IMF Managing Director Kristalina Georgieva said her message to France was to "get your house in order."

Political and fiscal backdrop

Yields on French government bonds, known as OATs, have surged to multi-decade highs this year amid rising concerns about France's fiscal outlook. Moulin said he was confident about financial stability in France and Europe, pointing to solid banking, insurance and financial sectors that were well capitalized with ample liquidity.

He said rising interest rates are a global phenomenon and called for stricter fiscal consolidation in several countries. He added that France has no problem finding investors to buy its bonds, citing the strength of its economy.

France is in a political crisis. Prime Minister Sebastien Lecornu's government recently submitted its draft 2027 fiscal budget, but is expected to face obstacles in the politically fractured National Assembly. Lecornu has said he will target 54 billion euros in spending cuts. Budget negotiations have caused political turbulence in recent years, and nationwide student protests have added to the government's challenges. Investors are also looking ahead to next spring's French presidential election.