François Villeroy de Galhau: Overcoming the energy crisis - a
European perspective (and beyond)
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the
Paris EUROPLACE Tokyo International Financial Forum 2022, Tokyo, 15 November
2022.
* * *
Ladies and Gentlemen,
It is a great pleasure for me to be with you again -physically with you - in Tokyo for this
International Financial Forum organised by Paris Europlace. I am honoured to share the
closure of this event with my colleague and friend Governor Kuroda. We face together
the awful Russian war in Ukraine, and its consequences on energy and economy. I will
start with a brief description of the macroeconomic outlook in the euro area, and with
our monetary policy normalisation (l). I will then focus on sustainable finance in France,
Europe and Japan: it has a key role to play in our ecological transformation, more
needed than ever (II).
I. Macroeconomic outlook in the euro area
A. Despite recent shocks, growth outlook has shown overall resilience so far
Let me start with the macroeconomic situation in the euro area, which has so far shown
resilience. In 2021 our economy had strongly recovered from the Covid crisis: growth
had reached 5.2 %, and even 6.8 % in France. We Europeans have remarkably
overcome the Covid crisis, which hit us early and strongly. We achieved this through
enhanced European unity, for instance in purchasing vaccines, and in implementing
(i)
common budgetary measures to support our recovery (SURE and Next Generation
EU programmes).
This allowed for a significant carry-over: according to Commission's forecasts published
(ii)
last Friday, euro area economy should grow by 3.2 % in 2022 as a whole , more than
the forecast for the United States. As for 2023, while slowing down, growth could
remain positive at 0.3 %, and it should rebound to 1.5 % in 2024.
All economic forecasts are nevertheless surrounded with high uncertainty at present
times, in light in particular of the latest of an unprecedented series of shocks. By the
way, this is why we need to regulate strongly and quickly crypto assets internationally:
the last episodes show us that we cannot allow for a second "crypto winter" to still add
to uncertainty and financial instability. The Russian war in Ukraine is feeding a further
surge in energy prices and other commodities, hence a negative shock on terms of
trade. This geopolitical and economic environment weighs on the confidence of
businesses and consumers.
In particular, inflation has become the prime concern of our European citizens. The rise
in consumer prices has amplified in recent months, reaching 10.7% in October - France
displays the lowest rate in the euro area with 7.1 %, thanks in particular to its "tariff
shield" which protects households from increases in energy prices. Although such fiscal
measures are politically needed, they should remain temporary, in addition to being
targeted more precisely at consumers who need them the most, and targeted in
keeping a "price signal" that provides an incentive to decrease energy consumption, in
order to help minimise the risk of energy shortages. They should also be further
coordinated at the European level.
B.Monetary policy will be efficient to bring inflation back towards 2%
Let me clarify something fundamental: in the medium term, the real answer to inflation
is not fiscal, it is monetary. In the euro area and elsewhere, although it retains a strong
external component (around half of headline figures in the euro), inflation is becoming
more "domestic" and broad-based. In October, core inflation (which excludes energy
and food) stood at 5.0% in the euro area. Monetary policy has a more direct impact on
core inflation, and central banks cannot not let it get out of hand and persist. This our
mandate, and our responsibility. Therefore a normalisation in our stance has been
clearly warranted over the last year.
The ECB Governing Council decided on 27 October to raise its key rates by another 75
basis points, the third significant increase in a row, bringing the deposit facility rate to
1.5 %. In doing so, we have removed a substantial part of our accommodative policy,
and are clearly approaching the "normalisation range" which can be estimated at
around 2% in the euro area. We should reach this level by December. Beyond this, we
will probably continue to raise rates, but we may do so in a more flexible and possibly
less rapid manner - "jumbo" rate hikes will not become a new habit. Since July, we have
been making decisions on a meeting-by-meeting basis. A favourable condition to
interrupt rate hikes would be clear signs of a turnaround in the core inflation trend, i.e.
excluding energy and food.
One word about the comparison with the US: on both sides of the Atlantic, inflation is
too high. But it doesn't have the same nature: the energy component is higher in
Europe; the demand one higher in the US, where the labour market is also tighter.
Hence we don't need to raise rates at the same pace, nor to the same level. That said,
signs of peaking inflation - headline and core - in the US last Thursday are good news
for everyone, as the US has been ahead of the global inflation cycle, and the US
monetary tightening has had strong spill overs on the rest of the world through the high
level of the dollar.
Central banks are thus playing their part in the fight against inflation, but let us not
forget structural economic measures. "Beefing up" our productive capacity also has the
potential to help reduce inflation in the longer term, in addition to increasing potential
growth. This holds especially true when it comes to our ecological transformation, in
order to decrease our dependency on fossil fuels. Beyond the significant adaptations
that are needed in our productive systems, this major transformation will require
massive investments, both public and private. And this is where sustainable finance has
a key global role to play.
II. Sustainable finance in France, in Europe and in Japan
A. Sustainable finance, especially green finance, remains dynamic despite
difficult conditions in bond markets
While issuance of bonds have slightly decreased in 2022, due to an uncertain economic
and financial environment, it is striking that most segments of sustainable finance have
resisted well. In particular, green bonds have even continued to expand by 15% in the
(iii)
first half of 2022, reaching EUR 260 billion. Among those, sovereigns represent
almost half of total issuance volumes. The French state, which was the first sovereign
issuer of green bonds in 2017, now has the greatest outstanding, amounting to EUR 45
billion. And the European Commission, with its ongoing NGEU programme, is gaining
momentum and will become the biggest issuer within the next few years, as it is set to
issue 30% of this programme, or EUR 250 billion, in green bonds.(iv)
Japan is also gaining momentum, notably through its green growth strategy laid out in
December 2020 to facilitate private investment - through green finance among others.
B. Central banks' and supervisors' actions regarding climate change
Central banks and supervisors are delivering what they promised, in their catalytic role
within the financial system. Let me stress a few recent and important steps forward in
Europe and in France. The Eurosystem is now incorporating climate change into the
ECB's monetary policy operations, as announced by President Christine Lagarde in
early July. When it comes to its non-monetary policy portfolios, after achieving the 2°C
objective, the Banque de France will now align them with the 1.5°C objective, starting
with European equities by end-2023, and completely by end-2025.
As supervisors, the French ACPR conducted the first pilot stress tests dedicated to
climate risks in 2021, followed by the ECB in 2022. Many jurisdictions (36 at this stage,
including Japan) have followed, or are following the same road. The release last
(v)
summer of six updated NGFS macrofinancial scenarios will allow for enhanced
assessments. This network, based in the Banque de France with an Asian chair, Ravi
Menon of MAS, now has more than 120 members. We are very happy to count the
Bank of Japan and the Japanese FSA among them.
C. Raising stakes for standard setting and supervisory requirements
Appropriate disclosure is obviously of the essence to foster sound and trustworthy
green finance. Europe has been a pioneer in drafting standards. Since then, the newly
(vi)
born ISSB has published two draft standards on general disclosure requirements and
climate-related disclosures, and the US SEC climate(vii) has published a proposal on
related requirements, which would - if adopted - gradually come into force between
2024 and 2026.
These initiatives are obviously welcome: climate change is a global topic. And we
cannot, even if we wanted it, have a single standard. But we collectively have to ensure
that these standards are interoperable: as a bottom line, when an entity complies with a
set of requirements from any jurisdiction, it should mean that it also complies with the
global baseline provided by the ISSB. None of the major sets of norms are carved in
stone; the EFRAG and ISSB are fortunately working hard towards convergence, and
making strong and quick progress.
As a complement to stress tests, relying on robust transition plans from banks and
insurers is the best way forward. It would allow for a dynamic, holistic and risk-based
approach, which in my view is far preferable to static and not risk-based
greensupporting and brown-penalising factors. The question now is how to "operationalise"
(viii)
stress tests and transition plans into capital requirements. In my view the simplest
and most international way forward is to integrate them into Basel capital requirements,
in Pillar 2 on risk governance, business model and credit risk as a first-stage approach.
* *
To conclude, let me recall what the avant-garde fashion designer Issey Miyake
inspiringly said: "Many people repeat the past. I'm not interested. I prefer evolution."
Today's shifting world gives even more credit to this Japanese master, who relentlessly
navigated between Tokyo and Paris, designed Steve Job's black turtlenecks in which
he delivered his keynote speeches, and stood as a pioneer of fashion tech and ecology.
Let us, in this challenging crisis, stand as pioneers too.
(i)
Support to mitigate Unemployment Risks in an Emergency
(ii)
Autumn 2022 Economic Forecast: the EU economy to a turning
point, European
Commission, 11 November 2022
(iii)
Source: Bloomberg, Banque de France calculations
(iv)
European Commission, Next Generation EU Green Bonds
(v)
Network for Greening the Financial System
(vi)
International Sustainability Standards Board
(vii)
Securities and Exchange Commission
(viii)
Past progress induces new challenges : raising the stakes
Villeroy de Galhau, F.,
for standard disclosure, supervisory requirements and collective governance, speech,
Climate Finance Day, 27 October 2022