François Villeroy de Galhau: Recent European economic
challenges
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Paris
Europlace International Financial Forum, Tokyo, 5 December 2016.
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Accompanying slides.
Thank you for your invitation. I am very pleased to be here in Tokyo for the first time as a
Governor. France and Japan have a lot in common. Both our countries have a long history and
culture, a long-term vision and a strong private-public partnership. And Bank of Japan and
Banque de France have developed a rich and fruitful relationship. Let me thank Governor Kuroda
for his enlightening comments on digital innovation and FinTechs, which Banque de France
clearly supports. I will focus for my part on European economic challenges.
In 2016, the world in general, and Europe in particular, has experienced a period of high
uncertainty: uncertainties relating to our security, with the threat of terrorist attacks; political
uncertainties, with "Brexit" and, more recently, Mr Trump's victory in the United States; as well as
economic uncertainties, including oil prices or Chinese growth, and high market volatility at the
beginning of the year. The referendum in Italy yesterday may be deemed as another source of
uncertainty. However it cannot be compared to the British referendum: Italian people have been
called to the polls to vote on an internal constitutional matter, and not about Italy's long-standing
EU membership. We will nevertheless look closely at its consequences.
If we look beyond uncertainties, we have also received positive news; in particular, recovery is
underway in Europe. As you may know, a meeting of the ECB Governing Council will be held in
three days, so I have to respect a silent period and I will not speak on monetary policy matters.
But I can emphasize that, in response to weak inflation and heightened uncertainties, the
Eurosystem, of which the Banque de France is a member, has acted decisively. In addition,
several European countries have implemented structural reforms since the onset of the crisis
and, at the same time, the EU and the euro area have taken significant steps to enhance
economic and financial integration and stability. All these efforts have strengthened the euro
area's resilience as shown by limited reactions to Brexit or the US elections or by the unaffected,
steady recovery in the euro area.
1/ Changes in economic conditions
[Slide 2] In Europe, economic recovery is underway. Europe is continuing to recover, at
1.7% in 2016, and is expected to carry on recovering in 2017. Euro area growth is robust
since it is supported by domestic demand, i.e. household consumption and corporate
investment. New more detailed euro area growth and inflation projections will be published
on 8 December.
It is particularly important to note that labour market conditions are improving and
unemployment is receding. In the euro area, on the past 4 years, the unemployment rate has
dropped from 13% to 9.8% last October and is at its lowest level in four years. It is still too
high but is going in the right direction.
For France, after 1.2% of GDP growth in 2015, we are likely to see a growth rate above that
range for 2016 and 2017. In the short term, we expect growth at 0.4% in the last quarter of
2016. The Banque de France will publish its new growth and inflation projections for France
on 9 December.
Inflation developments
[Slide 3] Inflation, which was nil in the euro area in 2015, rose steadily in 2016: it should
reach 0.6% in November. Monetary policy has helped and will continue to support a move
toward the Eurosystem objective of an inflation rate below, but close to, 2% over the medium
term. In addition, oil prices have bottomed out since the beginning of this year and this
should directly help inflation to increase beyond 1% in the first months of 2017.
[Slide 4] The comprehensive package of measures adopted on 10 March 2016 made euro
area monetary policy more accommodative. One of its distinctive features is that it targets
the financing of the real economy. The second series of targeted refinancing operations
(dubbed "TLTRO 2"), for an amount of EUR 444.6 bn allotted so far, should continue to
improve medium-term funding conditions for banks and foster bank lending to companies
and households.
2/ Structural policies
Progress has also been made regarding structural reforms. Several European countries,
including Germany and Spain, are showing the way forward to Europe. They have succeeded in
carrying out wide-reaching reforms that are compatible with our common European social
model, which combines high standards of public service and relatively low levels of inequality -
much lower than in the American society. Progress has been made in all four key areas:
Enterprise, Employment, Education and Expenditure reduction. And these reforms are delivering
results today: in recent years, GDP and employment have grown much faster in those countries.
Contrary to preconceptions, France has also demonstrated in the past its capacity to meet the
challenge of economic and social reform. In the 1990s, to prepare for the introduction of the euro,
France pursued a competitive disinflation policy that proved highly effective. Remember that in
the late 1990s, France experienced the highest GDP growth and the weakest inflation rate
among European countries, along with a significant fall in its unemployment rate. Today, French
reforms are heading in the right direction, [Slide 5] in particular the Tax Credit for
Competitiveness and Investment (CICE) and the Responsibility and Solidarity Pact (RSP) which
are designed to foster an improvement in the competitiveness of the French economy. We
should obviously persevere with more reforms. But progress has also been made with the recent
labour law ('Loi El Khomri') which, among other things, clarifies the conditions under which firms
can carry out dismissals for economic reasons.
Besides, France has strengths in the financial sector that we should not forget: robust banks and
insurance companies - they went through the crisis without public money except in one very
specific case (Dexia) -, a dynamic asset management industry, strong financial market
infrastructures, and a highly skilled labour force. And the French authorities, including the Banque
de France, attach the utmost importance to ensuring that Paris is one of Europe's strongest and
most attractive financial centres, still more after Brexit. You spoke about Brexit this morning. It is
too early to tell what will be the precise choice of the British government, but one principle is
obvious: if they want to keep full access to the European single market, they will have to apply all
its rules. There can be no free riding, and no cherry picking. And if Britain were to choose a "hard
Brexit", this would in particular mean the end of the European passport for the City of London. Be
sure that the Euro area will then be one of the most integrated financial zones worldwide: we
have a solid common currency, we have high savings resources, we already have a Banking
Union, and we have a couple of significant financial centers, starting with Paris. Brexit was
clearly not our wish, but we are now ready to welcome Japanese financial institutions; my
predecessor Christian Noyer has been assigned to this mission by the French government and
already came twice to Tokyo in the last months to convey this very concrete message.
3/ How can we give further impetus to Europe?
Getting back to the European level, I would like to point out that many improvements have also
been made in the field of crisis prevention and management. Prevention is based on much more
efficient financial regulation and on a European governance framework that is better organised
now with well-designed monitoring mechanisms on fiscal performance as well as on
macroeconomic imbalances and structural reforms. Banking Union contributes to strengthening
financial stability in the euro area and the EU as a whole and to ensuring that the banking sector
is safe and reliable. The global European picture is of substantially enhanced resilience since the
crisis. The Common Equity Tier 1 ratios of significant banking groups in the euro area have risen
from 7% in 2008 to 14% today. Crisis management - including for Greece - has also evolved
considerably with the creation of the ESM. So you can be fully confident about the resilience of
the euro and of the euro area. It is not only an economic asset, it is also a political one, supported
by each of the 19 governments and - which is still more important - by 68% of euro area citizens
(and even by 70% of French citizens and 73% of German citizens).
Moreover, monetary policy played its full part to maintain euro area cohesion. Europe has clearly
succeeded with monetary union, but monetary policy should not remain the only game in town.
We must continue to make progress towards economic union in order to achieve more and to
further join forces in the new international context. To do so, Europe should seize the opportunity
to move forward on three concrete steps towards Economic Union:
The first step, as of today, is to build a "Financing and Investment Union" (FIU) to steer
abundant savings into productive investment. Resources are not lacking: in the euro area,
the current account surplus, which is a measure of the excess of savings over investment,
stands at more than 3% of GDP. This trend is often described as a "saving glut" but I believe
it is more fitting to talk of an "investment crunch" [slide 6], since we lack productive
investment. The FIU would merge together the initiatives already in place: the Capital
Markets Union of course, but also the Juncker Investment Plan - which aims, through the
use of limited public guarantees, to foster private investments totalling EUR 630 billion in six
years -, and the Banking Union. We need to put the pieces of the puzzle together in order to
magnify their impact through synergies. There are two objectives: [slide 7] increased
diversification of firms' financing - with more equity financing -, and higher resilience of the
euro area thanks to private risk-sharing across domestic borders.
[slide 8] The second step, after the FIU, would be a collective economic strategy for the euro
area. Growth and employment will be stronger in Europe if we combine more reforms where
they are needed, such as in France and Italy, and more fiscal support in those countries with
room for manoeuvre, such as Germany. In practice, for such a collective economic strategy
to exist, the euro area needs an institution that fosters confidence: it could consist of a euro
area "Finance Minister".
The third step, in the longer term, would be a European fiscal capacity. It comes at the end
as it requires more convergence and more confidence. A genuine euro budget would be a
stabilisation tool and could include, for example, a euro area-wide unemployment insurance
scheme. It could also be used to finance certain "European public goods" such as digital
technology, the energy transition or the integration of refugees. And in the long term, it could
directly issue common debt and even raise taxes.
Let me sum up. Since the beginning of the crisis, Europe has been able to strengthen itself and
to build a set of instruments and mechanisms that have significantly increased its resilience
(Banking Union, the ESM, the enhanced SGP, etc.). It is now a matter of continuing this progress
and not seeing Brexit as a shock to the euro area but rather as an opportunity to pursue, in a
structured way, the setting-up of a better Economic Union. And at the core of Europe, France
has made progress, which needs to be accelerated. But in an uncertain world, France appears
as a rather stable country, seen from the resilience of its economy, the strength of its financial
sector, as well as the solidity of its political institutions.