François Villeroy de Galhau: The euro - 25th anniversary of the
Maastricht Treaty
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Osservatorio
Permanente Giovani-Editori, Florence, 7 February 2017.
* * *
Ladies and gentlemen,
I wish to sincerely thank the Osservatorio Permanente Giovani-Editori and its Chairman, Andrea
Ceccherini, for inviting me. I am delighted to be with you this afternoon, with the young people of
Italy, in a country that I love. A country that is at the heart of Europe and that has often marked its
history, as illustrated by your magnificent city of Florence, and the glory of its Quattrocento,
cradle of the whole European Renaissance. But a country that currently has doubts about
Europe. I stand before you, following in the footsteps of Ignazio Visco, Jean-Claude Trichet, Jens
Weidmann and Klaas Knot, as both a central banker and a committed European. And, on this
7th of February, I want to speak to you about the euro: today is the 25th anniversary of the signing
of the Maastricht Treaty. The euro has existed now for 18 years and for the past 15 years it has
replaced the Italian lira and the French franc in our wallets. I want to start by saying what the
single currency has brought, in concrete terms, to the Europeans and then reply to four doubts
that we often hear about the euro. Lastly, I want to talk about what remains to be done collectively
in the future.
* * *
I. The euro has brought us all four main benefits
Maastricht and the euro are naturally part of a broader history: the history of Europe, and its
singular achievement of making the transition from war to peace. This history is just as topical in
the highly uncertain world of 2017. Great Italians have counted among its key players, and not
least Alcide de Gasperi or Altiero Spinelli. But I would also like to cite an almost unknown
German, Josef Müller, founder of the Bavarian CSU, who was deported to a concentration camp
during World War II; In 1946, he was one of the first to say: "We need a European currency,
because countries that share a currency will never be at war". In 1990-1992, the time had come:
because German reunification required more European Union; and because the disintegration of
the Soviet bloc brought the European continent back to the global arena. And so, from Rome in
1990 where we launched the intergovernmental conference - I remember the Palazzo Madama
- to Maastricht in 1992, we created the euro. And others Italians have continued to be key
players, from Tommaso Padoa-Schioppa to Mario Draghi today.
Our foundations are therefore partly political; but the European edifice also has sound economic
foundations. And I now wish to discuss its four tangible and concrete benefits. These are the
three advantages of a sound currency: price stability; financing stability; and exchange rate
stability. And, this results in the euro being an internationally recognised currency.
Price stability, a prerequisite for purchasing power
First, the euro makes it possible to genuinely maintain price stability, i.e. to control inflation. This
is crucial to preserving household purchasing power and, in the face of uncertainties, to building
confidence in the value of the currency.
Before the euro, inflation sometimes reached very high levels in Europe. In the 14 years
preceding the euro (1985-1998), inflation gradually declined but remained above 3% on average,
with major disparities across countries: 5.1% in Italy and 2.6% in France for example. In the 14
years since the creation of the euro, inflation has come down significantly - in the period between
1999 and 2012 inflation averaged 2% - but the disparities across countries also narrowed: over
the same period, inflation in Italy was only 2.2%. We forget all too often the erosion of value - and
thus of confidence - that inflation generates. Over the last 14 years of the lira, cumulative inflation
had reached 98%; over the same length of time, with the euro, it is almost three times lower. As
of 2013, inflation has even been too low in the euro area, and this is why the ECB has been
successfully conducting an active monetary policy since 2014.
In practice, the ECB's target is an inflation rate below, but close to, 2% over the medium term.
This definition has not changed since it was adopted in 2003 and is broadly shared today by all
the main central banks of developed countries, including the United States and the United
Kingdom. In the current environment, it is important to recall that monetary policy has an internal
aim (keeping inflation under control), not an external aim (devaluing the exchange rate, which
could trigger negative chain reactions). Why 2% and not 0%? In order to keep a safety margin, as
inflation that is too low is as bad as inflation that is too high: it creates the risk of deflation, i.e. a
general and lasting downward spiral of prices, which generates a fall in economic activity and a
rise in unemployment. Furthermore, slightly positive inflation oils the wheels of the economy, for
example when there are labour market rigidities or differences between regions of the euro area.
The stability of financing via the decline in interest rates
Controlled inflation results in a fall in market risk premia: this leads to lower interest rates in the
euro area, and especially narrower spreads between countries. Let us take the example of our
respective countries. . Before Maastricht, between 1986 and 1992, the spread between Italy and
Germany was 5.1% on average, while it was just 1.4% in 2016. Admittedly there were pressures
in 2011-2012, stemming directly from temporary doubts over the sustainability of the euro area.
For France, the spread has also narrowed, from 1.9% between 1986 and 1992 to 0.3% in 2016.
The French spread may also temporarily react to political uncertainties, but remaining in the euro
over the long term continues to be our best protection. All economic players are benefiting from
lower interest rates: households - when they purchase a property - and companies that invest,
as well as governments and hence taxpayers. Some critics would like to leave the euro to let
deficits rise without being constrained by European rules. But that is wishful thinking: the
financing of deficits would be much more costly for euro area countries leaving the single
currency, if we were to return to the spreads before the euro.
Exchange rate stability and the strength of the single market
The euro also helps consolidate the single market, which the European Member States have
constructed step by step since the Treaty of Rome in 1957, 60 years ago. In order to achieve
greater trade integration, it was necessary to reduce currency fluctuations: Europe first
attempted this, as of 1979, with the European Monetary System, built on a common currency,
the ECU. But this mechanism was insufficient to ward off speculative attacks: remember the
severe crisis of September 1992 which forced the Italian lira out, making it lose 21% of its value,
and which destabilised the European economy. The single currency put an end to these serious
disruptions. It also considerably simplifies day-to-day life: there are no longer any conversion fees
for individuals, or any more uncertainties relating to exchange rate volatility for companies. For
many firms, including Italian imprenditori, their market naturally expanded from their domestic
market to the whole of the euro area. According to empirical studies, the euro has thus led to a 5
to 15% increase in trade between Member States.
An internationally recognised currency
The economic size of the euro area and the stability of its currency allow the euro to play an
international role. Before the euro, in 1995, only the Deutsche Mark was an international reserve
currency, with a share of 15% of global reserves. Today, our shared currency accounts for 20%
of international reserves, in second place behind the dollar. An internationally recognised
currency generates economic gains: the financial markets are more attractive for foreign
investors, more liquid, and therefore more efficient. But it also carries a political weight: I know
that when Mario Draghi speaks at the G7 or at the G20, the whole world listens to Europe
attentively. In the global financial arena, which has become turbulent, this union is our greatest
chance; none of our countries would have such clout in insolation. Our sovereignty relies
necessarily on European sovereignty.
* * *
The euro makes us more robust, and gives us more confidence in our currency: this is a
considerable asset amidst so much uncertainty. The euro has naturally also provided us with a
strong symbol of unity among European nations. Moreover, from 12 at the start, the number of
participating countries has risen to 19 today: 7 countries decided democratically to join the euro,
and none has wanted to leave it. These are the concrete economic benefits that make the 340
million citizens of the euro area attached to their currency, to our currency. This attachment,
which has been measured since the outset, has remained strong throughout the crisis. 70%
support the euro today, i.e. the highest level since 2008; a large majority of French citizens
support the euro (68%). Support remains strong in Italy, albeit at a lower level (53%). The euro is
not a technocratic utopia: it is a political and democratic decision, supported 25 years on - with
hindsight - by a clear majority of citizens.
II. However, there are four doubts about the euro.
I will address them seriously, even though I think that these ideas are erroneous.
a) The euro is enemy of growth and employment
Some say that the euro acts as a brake on growth, employment, and competitiveness. However,
at 1.7% in 2016, growth in the euro area was higher than US growth (1.6%) and above all there
are major economic successes among euro area countries. Out of the 35 OECD countries, that
with the second highest real GDP growth was Ireland at 4.3% in 2016, and Spain is also growing
strongly, at 3.2%; the country with the lowest government debt at end-2016, was Estonia, at
9.5% of GDP; several countries in the area, including Austria and Germany, boast almost full
employment, at between 4% and 6% in 2016; Estonia and Finland are among the top 3 countries
in terms of science scores in the PISA test. So the euro is not to blame, it is the different national
policies.
Admittedly, with the euro we have lost the tool of currency devaluation. Devaluation can have
positive effects in the short term as it lowers the price of exports, but, in the medium term, it can
have significant negative effects: it can exert inflationary pressure via the rise in import prices; it
can make the country poorer, via the reduction in the value of its assets, and conversely the
increase in its external debts; and lastly, it creates the risk of a trade war, with chain
devaluations, as was the case in the 1930s. On average, we have a suitable exchange rate with
the euro. But no lasting success in economic history has been built on a weak currency; all have
been built on a good structural environment, corporate innovation, and a high level of
specialisation among firms. Italian creativity, your commercial ingenuity, dating back to Venice,
Genoa and Florence, count much more than the facility of a weak lira.
b) The euro is an "all-risks insurance" for all Member States
This view appears to be the opposite of the preceding one; in fact it stems from an equally false
perception: attributing excessive evils or benefits to the euro. A currency is an essential nominal
value; but this alone does not determine the real performance of the economy. In the first part of
the 2000s, once it had acquired the collective gain of the euro, France and Italy, like many
Southern European countries, wrongly believed that it was possible to let up on competitiveness
efforts, which are nonetheless an ongoing imperative - "there is no free lunch". Today we are
suffering the consequences: we have lower economic growth and employment than some of
our neighbours, such as Germany and Spain, which succeeded in carrying out the reforms
necessary for enterprise (corporate sector), employment, education and expenditure reduction
(public sector).
Contrary to what some say, our lag in growth is not due to excessive fiscal discipline. The
government debt to GDP ratio has more than doubled in Italy since 1980, and it has risen fivefold
in France. When my generation was 18 years old, debt stood at 20% of GDP in France. For your
generation today, it verges on 100% of GDP in France and in Italy stands at over 130%. We have
failed when it comes to intergenerational solidarity and sustainable development. And as far as I
am aware, neither France nor Italy has become a champion of growth in Europe. France and
Italy are lagging behind today because of a lack of national reforms. The euro cannot and will
never be able to replace them. And this is good news since it means that there remains much
room for our domestic policies, our collective debates, and our creative efforts.
c) European monetary policy fosters inequality
For some, the ECB's current low rates are generating social inequalities: savers who have put
their money in fixed-rate products are being penalised by lower returns, while those who own
shares or property are benefiting from the rise in asset prices. The reality is very different. First,
because savers and asset holders are generally one and the same. Second, and most
importantly, because this very piecemeal analysis ignores the macroeconomic impact of
monetary policy, which benefits us all. Our measures create very favourable financing
conditions, which are stimulating demand via consumption and investment, and speeding up the
decline in unemployment. All this helps to reduce inequality, as unemployment tends to hit the
poor and less-qualified the hardest. According to estimates, as a result of our actions, euro area
economic growth was boosted by 1.5 percentage points between 2015 and 2018.
With regard to inequality, now is precisely the time for us Europeans to talk about our
experiences. We all share the same social model - to which we are strongly attached -
combining a high volume of public services with markedly less inequality than in other countries -
for example in the United States. The right response to inequality, therefore, is not a change of
monetary policy. And it is not more protectionism, even though the rules of global trade need to
ensure the benefits are spread more widely. The correct response to inequality is to develop the
right social model.
d) The euro is controlled by technocrats in Frankfurt
Yes, Frankfurt is in Germany... just as Brussels is in Belgium. But yes, despite this, the ECB
belongs to us all: not just to the Germans - as the Italians tend to think - and not just to the
Italians - as the Germans tend to think. With the Eurosystem, that is the ECB and the 19 national
central banks, we have had a genuine federal system, one that works, since 1999. We take our
decisions collegially, within the Governing Council, and then apply them in each of our member
countries. ECB staff - at the heart of the system - only account for 5% of total Eurosystem
headcount. France and Italy thus have much more say in decisions today: before the advent of
the euro, de facto our monetary policies closely followed that of Germany.
In addition, to guarantee that we act in the general interest of the euro area, and not that of
individual countries, the central banks of the Eurosystem are all completely independent and free
from political influence. This independence is sometimes questioned, but it is a strength: we
have to commit over the long term to serving the mandate entrusted to us - price and currency
stability. This independence is therefore governed by a strict framework: a clear objective; an
obligation to report results regularly to our citizens and to their elected representatives; and a
democratic process for the appointment of all senior figures.
III. What remains to be done, tomorrow, collectively
The euro has brought great benefits, in the form of soundness, confidence, unity and sovereignty
- as I have endeavoured to remind you. However, it also raises questions, which I have tried to
answer, while at the same time underlining that the euro cannot be held responsible for
everything that happens. But we have not yet come to the end of the road. We cannot ignore the
rising tide of Euroscepticism in Europe, and the extreme case of Brexit. I particularly like this
saying, attributed to Dante, one of the great citizens of Florence: "Some wait for time to change,
others seize the moment and act." But what direction should we take? Less Europe? That would
be a mistake if we want to take collective control of our destiny in this new world - a world
marked by direct criticism and unilateral action on the part of the new President of the United
States. What we need is not necessarily more Europe, but rather a "better" Europe: a Europe
that is less caught up in the detail, more focused on a few key priorities, and more efficient. A
Europe that talks less and acts more: "Little, well, until the end."
Of course, there are some non-economic areas: youth training - like Enrico Letta, I believe in the
benefits of an Erasmus-pro programme for apprenticeships - climate change, defence and the
protection of our borders, for example. On the economic level, we should be proud of our
successes - our single currency, our single market and our shared social model. But to
complete the success of our monetary union, it is vital that we make progress on our economic
union. There are two concrete levers for achieving this .
A "Financing Union for Investment and Innovation"
The first immediate step is a "Financing Union for Investment and Innovation" (FUII). Why? In
those economies that are close to the so-called technological frontier, as is the case with France
and Italy, innovation is the key to economic growth, and not just for start-ups. The problem is that,
today in Europe, there are companies that want to invest and innovate, but that cannot find the
right financing, notably equity capital. And yet it is not for lack of resources: the euro area has a
savings surplus of more than EUR 350 billion, equivalent to more than 3% of GDP. That is huge.
The FUII must make it possible to channel that abundance of savings more effectively towards
investment.
To achieve this, we naturally need to build on the initiatives already in place at European level: the
Capital Markets Union, the Juncker Investment Plan and the Banking Union. But we also need to
foster synergies between them and go even further.
More reform at national level and a better collective economic strategy
When each State acts without worrying about its neighbours, we end up in a situation that is
suboptimal for everyone. There is no doubt that growth and employment would be stronger in the
euro area if its members committed to implementing more structural reforms where they are
needed, such as in France and in Italy, and to providing more fiscal or wage support where there
is room to manoeuvre, such as in Germany. But for that to happen, we need to rebuild the trust
between member countries. First by accelerating reforms at home - in France and in Italy - and
let me be clear, it is in our national interest. And then, in order for this collective strategy to exist,
the euro area needs an institution that inspires confidence, one that embodies and brings to
fruition the shared commitment of our Member States. This institution could consist of a
democratically legitimate euro area "Finance Minister". It could also - subject to certain
conditions - have a European stabilisation budget to enable it to cushion any economic shocks in
Member States; one possible solution, which remains to be discussed, could be a shared
unemployment insurance scheme, as suggested by Finance Minister Pier Carlo Padoan.
* * *
Allow me to conclude with the words of Carlo Azeglio Ciampi, that great Tuscan and President of
the Italian Republic, who unfortunately passed away just recently. "What has been achieved [in
Europe], in both the economic and political spheres, seems too important each time to be put at
risk: it is so important to give governments and citizens the courage to make further steps
forwards [...]. In this sense, the creation of the euro is not only an end point but also a starting
point." The euro has never been easy but it is not a self-imposed straitjacket - rather it is a
political and historical ambition. In these troubled times for Europe, we need both to buttress this
vital asset and to build on it for the future. We have to do it for your generation, because you are
the hope for Italy and for Europe. But more than that, we need to do it with your generation. Thank
you for your attention.