François Villeroy de Galhau: New ideas for Europe
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, Munich, 15 February
2018.
* * *
Mr. Prime Minister,
Ministers,
Dr. Theo Waigel,
Ladies and Gentlemen,
It is an honour for me to speak here this evening, following on from my compatriot from the
Saarland, the Finance Minister, Peter Altmaier. I am 100% French, but with family roots in
Germany that go back two centuries... and Dr. Altmaier even represents my town of Saarlouis in
the Bundestag. However, all honour today goes to Munich and to Bavaria, and I would like to
thank Dr. Theo Waigel for so kindly inviting me. Dr. Waigel, you played a key role in the
construction of our European currency. I would like to repeat the words that you used before the
Bundestag in April 1998 in anticipation of the transition to the third phase of our Economic and
Monetary Union: "After two devastating and painful world wars, the European project is opening
up opportunities to our children and grandchildren that our mothers and fathers, our ancestors,
1
would never have dared dream of". Twenty years later, we can state that monetary union is a
success: 74% of euro area citizens support the euro, and this figure is as high as 81% in
Germany. The Economic Union on the other hand, has not yet fulfilled its potential. And that is a
concern for two reasons. First, because even though the current economic cycle is in a very
robust phase today, it will come to an end at some point. If we have not armed ourselves with
stronger economic instruments by that time, there is a risk that monetary policy will be
overburdened. This is a well-founded German worry that as a central banker I share entirely; but
it is for that very reason that I say to our German friends that they must aspire to an enhanced
economic union. Second, because the absence of a genuine economic union is holding the euro
area back, at a time when we must stimulate growth to catch up our past lag, particularly
vis-àvis the United States, and address the radical technological transformation. The theme of this
evening is "new ideas for Europe". But to have new ideas, we must begin by putting the old
clichés that are paralysing the debate behind us. That is what I will begin by doing, before setting
out my three new ideas for Europe.
**
1. Three old clichés that we must put behind us
The first old cliché that emerges when we speak about reforming the euro area, is the idea - and
a lazy idea at that - that I would
economic union would be a substitute for national reforms.
like to repeat right away that on the contrary, national reforms are a prerequisite for any
enhancement of the Economic Union, and today, France is well aware of this. I say this in my
capacity as a totally independent central banker: the new government in France is taking reforms
very seriously and is acting with impressive speed. France is now a reliable economic partner of
Europe and Germany.
Second, it would be ridiculous to reduce the debate to the old caricature that contrasts "German
rules" with "French expenditure". To my mind, it is out of the question to implement a
"transfer union", which would only benefit certain countries, or to introduce Eurobonds, which
would amount to collectivising debts. Need I remind that France too is a net contributor to the
European budget, or to financing for Greece? But I am convinced that risk sharing between
countries can - and should - go hand-in-hand with risk reduction mechanisms. It is wrong to
draw a distinction between solidarity and responsibility: in reality, they are complementary. For
crisis prevention to be credible, it must also have the instruments needed to cushion the effects
of substantial shocks that may arise regardless.
As for the third cliché, let's stop pitting the "French vision" against "German pragmatism". In
order to reform the euro area, we must be practical and take real needs, and particularly those of
businesses and entrepreneurs, as our starting point - as I aim to do in the second part of my
speech. In 1978, Helmut Schmidt said that "the citizens of Europe just want solutions to concrete
2
issues". Nonetheless, we need a political ambition if we are to act - call it a "vision", if you wish.
We need this because we have to make progress - it's now or never: thanks to the economic
recovery, and thanks to President Macron's initial proposals at the Sorbonne, and the European
chapter of the German coalition agreement - it is obviously not my place to comment on the rest
of the agreement - we are enjoying historically favourable conditions. If we don't act in 2018 -
first the French and Germans, and then all 19 member countries of the euro area - we will never
make headway.
2. How to strengthen the euro area: three new ideas
I will now turn to my three new ideas to strengthen the euro area. In order to make genuine
progress in Europe, we must first start with the
real needs for corporate investment, and the
resources at our disposal. In terms of needs, the key to growth in the euro area today is,
without doubt, innovation. Chancellor Merkel spoke about it in Davos three weeks ago, while
companies in Bavaria are well placed to recognise its importance: over the past 50 years,
Bavaria has radically transformed its economy by rising to the challenge of innovation. But to
innovate, in digital technology, or in energy transition for example, companies need to be able to
take more risks, which requires more equity financing, over the long term, rather than debt
financing. The euro area is seriously lagging behind in this respect: equity capital amounted to
only 73% of GDP in 2017, compared with 123% in the United States. As for resources, let's take
what is often a difficult debate - on Germany's substantial surpluses - and transform it into a
positive: we have abundant savings in the euro area. In order to match resources to needs, I
propose a European-level "Financing Union for Investment and Innovation", which would
better channel the EUR 350 billion savings surplus into equity financing and innovation, in digital
or energy technologies. This Union should bring together existing initiatives, and as a priority, the
Capital Markets Union, but also the Banking Union and the Juncker Investment Plan. The Capital
Markets Union requires concrete progress on several fronts: amending accounting rules, taxes
and insolvency laws to facilitate cross-border investment, notably in equity capital; and
developing pan-European long-term savings products. Within the Governing Council, and
together with my colleague Jens Weidmann, President of the Bundesbank, we find it most
regrettable that the Capital Markets Union is currently being overlooked in political discussions on
enhancing the euro area.
My second idea to make progress in Europe is to start with the quality of public spending and
give priority to investment and expenditure for the future. Until now, we have mainly been
concerned with "quantities", and I would just like to say a word in this respect on the Stability and
Growth Pact: in my mind, it would be both dangerous and illusory to want to change the rules -
rather, let's respect them. But at the same time, we should consider the quality of public
spending: in order to boost potential growth, in the long term, expenditure on investment and on
our future are vital, including on education and training and, of course, new technologies. This is
true of national budgets, but we could amplify the effect through a euro area investment budget.
This budget could be used to finance, for the benefit of all countries, certain "common goods"
such as digital technology, energy transition, security, and external border protection.
Finally, my third idea begins with a question: how to deal with stabilisation? In other words, how
to deal with the shocks that can have a brutal effect on certain national economies? Private risk
sharing through the Capital Markets Union and the Financing Union that I mentioned earlier, is
part of the answer. In the United States for example, the stock market is capable of absorbing
around 40% of a State-specific shock. But that is not enough and it is absolutely vital that we go
further still. Otherwise monetary policy may bear too much of the burden during a future
recession, which would be dangerous - monetary policy should not be the only game in town. In
the euro area, we therefore need better economic policy coordination. Countries will continue to
be responsible for their economic policies, but we can aim for a better collective economic
strategy with more reforms in countries where they are needed and with more fiscal or wage
support in countries with room for manoeuvre. This collective strategy could be supplemented by
enhancing the European Stability Mechanism to transform it into a European Monetary Fund; this
would require that the scope of its actions be expanded to include a genuine crisis prevention
role and that its governance be amended. Otherwise, it would be a simple change of window
dressing.
**
To conclude, I would like to mention another reason why 2018 must be Europe's year: our
international environment, with the prospect of Brexit and the presidency of Mr. Trump in the
United States. Confronted with the challenges of globalisation, Europe's twofold message is
essential. First, our common social model - die Soziale Marktwirtschaft - combines a high level
of public service, relatively low levels of inequality and a strong intensity of social dialogue; it is
the ideal response to the debate on inequality, which is returning to the forefront. Second, our
commitment to multilateralism is vital to confronting the temptations of protectionism. We must
resolutely defend, alongside Canada and certain Asian partners, the commonly respected rules
and multilateral institutions. Today's world needs a stronger Europe. And so it's time that we,
Europeans, took our destiny into our own hands.
1
Address given by Theo Waigel on the third stage of Economic and Monetary Union, 23 April 1998.
2
Speech by Helmut Schmidt on the outcomes of the Brussels European Council, 21 December 1978.