France and Italy: The problem is not so much the fiscal deficit as the fact that it is primarily used to boost demand

France and Italy have decided to maintain a high fiscal deficit in comparison with the other euro-zone countries. So far , the financial markets have accepted this policy in the case of France, but not in the case of Italy. However, the reason why these fiscal deficits are open to criticism is not their level: they remain compatible with a stable public debt ratio; France is benefiting from strong demand for safe government bonds, Italy has as a domestic savings surplus. In our opinion, the main problem is the use of the fiscal deficit. In both countries, it will be increased primarily as part of a demand-stimulation policy, whereas both countries’ problem is a shortfall and inertia in the domestic supply of goods and services. So it seems strange to take a risk with public finances by increasing the deficit to boost demand as long as the domestic supply of goods and services cannot respond to an increase in demand.