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UPDATE 1-French growth can't be boosted by budget spending - cenbank governor Villeroy
December 11, 2016 / 6:47 PM / a year ago

UPDATE 1-French growth can't be boosted by budget spending - cenbank governor Villeroy

* Villeroy says French 2017 budget too optimistic

* Says 4 bln euros budget savings effort is do-able

* France must reform before asking Germany for growth boost (Adds central bank governor comments)

By Geert De Clercq

PARIS, Dec 11 (Reuters) - French central bank governor Francois Villeroy de Galhau said on Sunday the country’s economic growth cannot be boosted by increasing state spending and the budget deficit.

Large budget deficits in France and Italy have not made these countries European champions of economic growth, Villeroy said in an interview with French financial daily Les Echos.

“Nobody should create any illusions in the electoral debate: the acceleration of French growth cannot come from budget spending,” he said.

Candidates from the left and the right in presidential elections set for April-May 2017 have outlined major spending programmes to kick-start economic growth and employment.

Villeroy said the Bank of France estimates that France’s 2017 budget deficit will be around 3.1 percent of GDP rather than the 2.7 percent foreseen in the state budget.

He said France must respect its commitment to cut its state deficit to below 3 percent of GDP in 2017 and that doing so would mean a “do-able” budget savings effort of 4 billion euros, or 0.3 percent of public spending.

Villeroy said French public spending now accounts for 56 percent of GDP, while the same welfare model accounts for just 51 percent in Sweden and 47 percent on average in the eurozone.

He said the European Commission is right in saying some European countries, such as Germany and the Netherlands, have enough budgetary margin to support economic activity.

Last month, the European Union effectively urged the German government to spend more in an election year as Brussels moved further away from its mantra of austerity, pushing for euro zone countries to loosen their budgets for 2017.

The OECD too said last month governments need to get over the fixation with debt levels and ramp up spending on growth-friendly policies.

But Villeroy said France should not ask Germany to boost Europe’s economy if it could not bring its own house in order.

“France cannot legitimately ask the Germans for a growth boost if it is not credible itself in terms of accelerating reforms and commitment to its budget commitments,” he said.

He said reforms are crucial for boosting French growth, which the Bank of France estimates will still be too weak at 1.3 percent in 2016 and 2017.

“France has reformed more than it is given credit for, but less than its neighbours, which have shown us how to fight unemployment while respecting the European social model,” he said. (Reporting by Geert De Clercq; Editing by David Goodman and Ros Russell)

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