Inflation: why France is holding up better than its neighbours (for now) – The Conversation

Experts en Management

Mohamad Hassan Shahrour, IAE Nice et Aymen Smondel, Université Côte d’Azur, Le 11 Octobre 2022

Both the Covid pandemic and the energy crisis have put global financial stability in an unenviable position. Faced with rising uncertainty, policy-makers around the world have imposed a range of policies and restrictions. These, in turn, have rocked businesses and supply chains, causing the global economy to contract.

Due to the convergence of large economic deficits, historic levels of corporate debt and stimulus measures adopted by governments, countries now find themselves fighting inflation. In its simplest definition, inflation is a rise in prices and can result in a fall in purchasing power. Indeed, it is a reaction to a number of economic factors.

It is also an area where France appears to be more resilient than its neighbours. In August 2022, the country’s inflation rate (measured by the consumer price index) was 5.8%, compared with 7.9% in Germany, 9.1% in Italy and 9.9% in the UK.

Tariff shield and nuclear power

The main challenge facing countries, and contributing to inflation – or even stagflation (which refers to a combination of inflation and low economic growth) in the case of some economies – is the huge increase in energy prices. Faced with this rise, the total state budget devoted to mitigating household energy bills is set to reach at least 75 billion euros across the years 2022-2023, with schemes such as the energy voucher or the tariff shield.

These actions have kept the inflation rate well below that of most European economies. In addition, independent energy sources have made France less reliant on fossil fuel products, and therefore less vulnerable to energy price fluctuations.

For example, as indicated in Figure 1, from 2021 onward 69.33% of French electricity comes from nuclear power, compared to 14.8% in the UK and 11.8% in Germany.

At the same time, Figure 2 shows that Italy, Germany and the UK depend on fossil fuels for power generation.

Rising rates

Energy issues aside, countries are also impacted by the global market in a similar way that companies are by their institutional environment. As a result, future developments could lead to changes in public policy that could influence the inflation rate, which may or not have peaked.

For example, the European Central Bank’s decision to raise interest rates for the first time in a decade last July could weigh on countries’ balance of payments and thus give governments less room for manoeuvre in their policies to contain price increases.

Unless we achieve some sort of regional stability in terms of politics and economics, we cannot guarantee that France will be able to continue to outperform its neighbours in the coming months.

Mohamad Hassan Shahrour, Maître de Conférences en Finance, Université Côte d’Azur, IAE Nice et Aymen Smondel, Maître de conférences en finance, IAE de Nice, Université Côte d’Azur

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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