France can slash deficit to 3% by 2029, central bank governor says

France is “putting the house in order” and is capable of slashing its burdensome budget deficit, despite the political turmoil facing the country, the head of the country’s central bank insists.

The country is currently subject to the EU’s excessive deficit procedure, with the bloc recommending Paris bring its national deficit closer to 3% of GDP, compared to 5.1% as of last year.

Market concerns about political instability hampering efforts to bring the deficit under control have weighed on French bond markets this year, exacerbating pressures felt globally from the U.S.-Iran war and consequential inflation fears.

Speaking to CNBC’s JP Ong on the sidelines of the IMF Meetings in Bangkok, Banque de France Governor Emmanuel Moulin said that he did not believe rising government borrowing costs in recent months were linked to a change in the French fiscal position.

“It’s really about political uncertainty and the question whether the budget will be adopted with [delivering] a 5% deficit, which is the objective of the government,” he said. “And I think to reassure markets, it is important that there is a budget that is voted and a budget that sticks to the 5% deficit.”

He noted that, in the past, French governments had successfully consolidated public finances and drastically cut their deficits. But he said it was more difficult to deliver the necessary changes today, because the cost of servicing France’s national debt was so high.

“It’s about 10 billion [euros] per year more, so we need to take this into account in the consolidation,” Moulin said. “But I think it is possible to get back to a 3% deficit in 2029, which is the objective of the government.”

Asked whether the French government could deliver on that objective without enforcing a period of austerity, Moulin said Thursday that he didn’t think such a policy mix was in the cards.

“I would challenge the fact that this is austerity. This is not austerity. It is just putting the house in order,” he said.

Speaking to CNBC at the IMF Meetings last week, the institution’s Managing Director Kristalina Georgieva said her message to France was to “get your house in order.”

Yields on French government bonds, known as OATs, have surged to multi-decade highs this year amid rising concerns about France’s fiscal outlook, sparking concerns about a possible sovereign debt crisis that could impact the broader euro zone.

But Moulin told CNBC Thursday that he was “confident about financial stability in France and in Europe,” pointing to solid banking, insurance and financial sectors that were “well capitalized with ample liquidity.”

“It’s a global phenomenon that interest rates are increasing,” he said. “It calls for stricter fiscal consolidation in a number of countries, be it the U.S., be it France, be it some other European countries, also Japan. This is a global phenomenon. So I don’t think we should be too afraid of a risk of contagion.”

He added…