INSEE has given its first estimate of inflation for the month of February. Over one year, prices increased by 0.8% and by 0.9% in harmonized European data. We have to go back to 2019 to find such a low level. The continued rise in the prices of services (+2.1%) was offset by the stability of the prices of food products (except fresh products with +1.8%), manufactured products and the fall in energy prices (-5.7%). The industrial and agricultural sectors seem to have priced in the consequences on their production costs of supply chain disruptions caused by Russia's invasion of Ukraine. This makes the price stabilization in these sectors sustainable.

France therefore appears to be one of the best pupils in the European Union, which in terms of inflation has not always been the case. Germany, on the other hand, and so often cited as an example, still has, along with other economies in the euro zone, a price increase of more than 2%. This difference is partly due to energy prices, which fell in France in February. The country had experienced sharp increases in electricity tariffs in 2022 and 2023 due to the shutdown of nearly half of the nuclear fleet due to corrosion problems. It was then necessary to increase the use of thermal power plants at a time when sanctions against Russia had caused the price of natural gas to jump. There were no further increases in 2024 and the year-to-date declines therefore contributed to February's low inflation.

The situation is very different in Germany, where the closure of nuclear power plants has made the country dependent on natural gas supplies, the prices of which remain at a high level, which affects the competitiveness of companies that consume a lot of electricity (steel, chemicals). There is therefore a real divergence within the euro zone while the Member States are subject to a common monetary policy. The European Central Bank has cut its interest rates several times, which now stand at 2.75% and are expected to be cut again in the March 6th meeting to 2.5%.

However, because of the difference between inflation rates between countries, some, such as France, will have to put up with positive real rates, once inflation is subtracted, while others, such as Germany, will benefit from zero or even slightly negative rates. If we consider that the level of interest rates is an important tool of economic policy, this means that monetary policy should have a much more stimulating effect for Germany than for France. This is justified for our neighbors across the Rhine, who have been facing a recession for the past two years. But France, which has low growth, insufficient to allow a significant improvement in employment, needs lower real interest rates.

However, the persistence of inflation above the 2% target in the euro zone is likely to encourage the European Central Bank to moderate and even stop its rate cut policy. This will continue to penalise virtuous countries in terms of inflation and it is also likely to affect exchange rates. The European currency is approaching the threshold of $1.08 to the euro, its highest level in several months. The euro rise, which will be combined with the Trump administration's announced introduction of customs duties, will affect the development of exports.

This low inflation is not very good news for the public accounts and debt either. It mechanically reduces tax revenues, and in particular VAT revenues. It therefore makes it more difficult to return to a more reasonable level of budget deficit. Above all, the financial criteria adopted in the Maastricht Treaty, and in particular the one relating to public debt, are made more complicated to comply with in the event of low inflation for arithmetic reasons. The debt ratio compares the public debt, the increase of which depends on the accumulation of public deficits year after year, to the level of GDP in value of the year concerned.

If this year is marked by high inflation, the denominator increases faster than the numerator and the debt ratio decreases. If the denominator increases little due to low growth and the absence of inflation, then the ratio increases mechanically. We are then confronted with the paradox that a good student in terms of inflation is penalized for complying with European criteria in two ways. The stagnation of tax revenues makes it more difficult to reduce the deficit and public debt in relation to GDP in value terms is also falling more slowly, despite the efforts made to control public finances, since GDP in value terms is growing less than if inflation were higher.

We often marvel at the situation of deficits and debt at the end of the 70s, the last period when France had a balanced budget and a low debt ratio. But this was not due to the rigorous management of the governments but to the tremendous inflation that the country had experienced, exceeding 13% in 1980. Revenues soared, covering expenses more easily, and above all the level of debt in relation to GDP was mechanically reduced. But this was not without consequences for savers who were the real victims of this policy. Their savings accounts rarely yielded more than 7% and they often lost more than 5% of purchasing power on their savings each year.

The low inflation that France is experiencing today should also lead to a review of the way the State debt is managed. More than 10% of this is made up of bonds indexed to price changes. In recent years, very low inflation has been an advantage for the debt burden. The interest charge each year (often less than 1%) was offset at maturity by the indexation bill. This postponed the cost to the budget by the same amount. These loans were indexed roughly equally to national inflation and to that of the euro zone.

Here again, the fact that inflation was higher than or equal to the European average was not a handicap. Everything has changed since French inflation fell sharply. The indexation charge already recorded for the years 2025 to 2027 is 12 billion, of which 10 billion concerns the debt indexed to European inflation. If the inflation gap continues, the bill will increase further. It is therefore essential that we review the issuance policy by sharply reducing the share of euro area inflation-indexed bonds in favor of French inflation-linked securities.

France's achievements in terms of inflation therefore has not only positive consequences, especially with regard to public finances. For the arithmetic reasons explained above, it makes it more difficult to establish a path for restoring the accounts and reducing the government's debt ratio. One solution could be for the European Central Bank to continue its policy of cutting rates. The meeting on 6 March is expected to ratify a further reduction, but there is no guarantee that the comments that will follow this decision will not raise serious doubts about the continuation of this accommodative policy, which would constitute an additional obstacle for France to the restoration of public accounts.