PARIS: French Prime Minister Manuel Valls blasted eurozone policies for failing to deliver growth and warned that the European Central Bank seemed “powerless” to ward off deflation, in a speech on Friday.

Valls, struggling to push through reforms of the lagging French economy, also said his government could not boost any further proposed tax breaks for businesses in return for jobs.

Eurozone policies had not delivered economic rewards and there was a real risk of deflation in the face of lower-than-expected growth and low inflation, Valls told a seminar at the Elysee presidential palace.

“The economic policies of the eurozone are not effective,” Valls said, adding that they “sadly take a long time to have an effect”.

There was a real risk of deflation, Valls said “because at the European level, growth and inflation are lower than what we might have expected”.

His comments came ahead of a meeting of the European Central Bank on Thursday, when analysts expect the bank to keep its policies steady while monitoring the course of growth and inflation.

Key indicators for the French economy — the second-biggest in the zone — suggest that it is lagging behind the recovery of other leading economies in the European Union, and notably the powerhouse Germany.

ECB looks ‘powerless’

Valls said that the ECB appeared “powerless” in the face of low inflation and added that the coming months would be “difficult” for Europe.

Unemployment “has reached an intolerable level,” he said against a background of record high unemployment in France.

On Thursday, a closely watched survey showed that the euro zone economy showed signs of a rebound in July but France was a notable exception.

The private Markit research group said according to its leading indicators — the purchasing managers’ index (PMI) - turned in a figure of 54, above the 50-point signalling growth or downturn, up from 52.8 in June.

But the French economy showed further signs of slowing with an index reading of 49.4.

Markit chief economist Chris Williamson said: “France appears to be entering a renewed downturn, after GDP stagnated in the first quarter.” At Berenberg bank in London, economist Christian Schulz, commenting on that data, said: “France risks getting left behind in the eurozone economic recovery.” France is under pressure to cut its public deficit to the EU norm of 3 per cent of gross domestic product.

However, Valls said his government could not add to measures already taken to reach this limit, which the European Union sees in any case as a maximum ceiling.

Valls referred to France’s so-called Responsibility Pact, which offers businesses 50 billion euros ($67bn) worth of cuts to taxes and social charges in exchange for a pledge to create about 500,000 jobs by 2017.

Colossal effort

He said that France had made a “colossal effort” and could do no more on this front.

The plan however is still very vague and has been attacked by a section of the left which sees big business being handed tax breaks funded by cuts in public spending in areas such as health and social benefits, with no obligation to do anything in return.

In July, the head of the International Monetary Fund chief Christine Lagarde had warned that low inflation could damage growth in Europe and urged the European Central Bank to maintain a flexible policy.

Declining inflation is a concern because it carries the risk of outright falling prices, known as deflation, which deters consumers from spending in the belief they can wait and buy more cheaply later.

If that happens, demand suffers and companies put off investment, hurting employment and so setting off a vicious circle which can drag down the whole economy.

Valls faces an uphill battle to push ahead with reforms of the French economy, which economists say now looks like the weak link in the European Union economic landscape.

Published in Dawn, August 2nd , 2014