François Villeroy de Galhau: France and Europe - economic
developments, reforms and attractiveness
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Paris
Europlace International Financial Forum, New York City, 18 April 2018.
* * *
Accompanying slides of this speech.
Ladies and gentlemen,
Let me welcome this traditional gathering - Paris Europlace in New York - with a less traditional
timing: one year after the French elections. And indeed much happened in these 12 months. In
my remarks today, I would like to elaborate on what I call "the French momentum" and more
generally the "euro area momentum". We have a unique opportunity to implement crucial
reforms both in France and in Europe that we must definitely seize.
So I would like to share with you some thoughts on (i) our cyclical favourable environment (ii)
hence, our structural acceleration, and (iii) Paris' attractiveness, including in the post-Brexit world
we must prepare.
***
1.Our cyclical opportunity and the present expansion phase
[Slide 2] The euro area economy is experiencing a strong and broad-based expansion:
we have now seen 19 consecutive quarters of positive growth. In 2017, real GDP growth peaked
at 2.5% and short-term economic indicators all point to a continued economic upswing.
According to the latest ECB projections, real GDP is expected to expand at 2.4% in 2018, above
potential. The breadth of this steady economic growth is noteworthy: dispersion across countries
and sectors is at its lowest level for two decades.
Growth has been supported by buoyant domestic demand and a pick-up in net exports.
Financing conditions for firms have been very favourable, supporting investment, while private
consumption has benefited from low levels of inflation.
[Slide 3] This steady economic growth has translated to the labour market bringing close to 8
million workers [7.8m] back to employment since 2013, more than offsetting the losses
experienced during the crisis. Annual growth in employment has reached its highest level since
2008 and the unemployment rate fell to 8.7% in the fourth quarter of 2017, the lowest rate for nine
years. Looking ahead, unemployment is expected to further decrease to reach 7.2% in 2020, in
spite of an increase in the participation rate.
[Slide 4] In France, GDP growth is robust, averaging 2.0% in 2017. Expansion is expected to
continue at a sustained pace in 2018, supported by strong domestic demand and a notable
increase in exports. Investment should remain robust thanks to favourable financing conditions
and the positive business outlook. Net exports are expected to pick up in 2018 and be supportive
of growth. The upswing is expected to continue in 2019-2020 with a GDP growth rate which
should remain above-potential growth, despite a slight slackening in global demand.
[Slide 5] In France too, the ongoing recovery has led to a strong decline in the unemployment
rate which fell to 8.9% in the fourth quarter of 2017. Since 2015, job creation has been boosted
by measures to reduce labour costs (CICE, PRS, SME hiring scheme) [I will come back to
French structural reforms in more detail later]. Although the unemployment rate is still too high,
notably among young people, our latest projections forecast a steady decline until 2020. Net job
creations are expected to remain strong as the economy improves.
Following improvement in the labour market, wage growth is expected to build up, supporting
households' disposable income and underpinning solid private consumption dynamics.
[Slide 6] Deflationary risks have disappeared in the euro area. Headline inflation printed at 1.3%
in March while core inflation is stable at 1.0%. We are now out of the deflationary risk zone
although inflationary developments still remain subdued. Yet, the ongoing economic upturn and
the labour market improvements are expected to pave the way to increasing inflationary
pressures, preparing for a return of inflation to a rate below, but close to, 2% over the medium
term. Our forecast is 1.7% for 2020.
[Slide 7] This gradual rise in inflation in the euro area and improvement in the outlook for inflation
is due in large part to the accommodative monetary policy of the ECB. We are now increasingly
confident that inflation will soon be on a sustained path of adjustment back towards our inflation
aim, and so justify our course of gradual normalisation. And we won't give in to fiscal dominance:
nobody should expect us to delay a warranted monetary normalisation in order to accommodate
the debt problems of any Member state.
2. Our structural acceleration: France is catching up
[Slide 8] Monetary policy plays its full role but cannot be the only game in town, as it may have
only a limited impact on national economic adjustments within the euro area. Since the financial
crisis, several European countries, including Spain, have successfully launched major reforms
and reached higher and sustainable growth while preserving their social model.
[Slide 9] However, efforts should be pursued to spur economic growth in the medium term.
Structural unemployment remains high and potential growth remains significantly below its 1990s
or 2000s average. Structural reforms are needed to unleash the full economic potential of
European countries.
The case of France, today, is particularly interesting in that regard. France faces important
structural challenges but as already said, the economic environment for reform has never been
more favourable since the financial crisis. So it is our imperative to "fix the roof", now. And the
good news is that reforms are on a firm upward path. I stress it as a fully independent Central
Banker: the new government has indeed displayed a strong commitment to reforms and already
implemented major structural reforms to boost employment, productivity and resilience.
[Slide 10] The recent labour market reforms have widened the negotiation space given to social
partners for decision-making and reduced the uncertainties of labour disputes.
This should give more flexibility to firms and contribute to supporting employment.
The ongoing apprenticeship reform aims at making this status more attractive for both workers
and firms, in order to tackle youth unemployment. In a context where the number of job
vacancies remains too high, the ongoing reform of lifelong vocational training, which is currently
too costly and inefficient, should help to better match the skills of workers to the needs of firms.
Add very significant reforms of primary and secondary education and university, and you can
expect a steady improvement in French labour's skills in the coming years.
The unemployment benefits reform will also be an essential building block in improving the
functioning of the labour market. More control over the job-search effort should increase labour
force participation and also contribute to tackling structural unemployment, while improving the
efficiency of the welfare state.
[Slide 11] Finally, consistent tax reforms have aimed at rebalancing the tax burden from
production factors towards broad-based taxes. Labour costs were lowered, with in particular a
tax credit on payroll, implemented in 2013 and reinforced by social contribution cuts this year.
Regarding capital, important measures have also been taken to alleviate taxation on productive
capital and savings: the scrapping of the household wealth tax on everything except property
assets, the introduction of a 30% flat tax on household capital gains, dividends or interests and a
decrease in corporate tax from 33% to 25% in 2022 to ensure convergence towards the EU
average. These measures should contribute to supporting the positive trend in private domestic
and foreign investment in France.
[Slide 12] All these reforms should be enhanced by further progresses made by the French
government to improve the sustainability of public finances; I would also hope for an acceleration
in this respect. Nevertheless, the present package is already impressive, and reinforces the
attractiveness of France. As you know, France has many assets: it has many fast-growing
techfirms. It offers high-quality infrastructures and a high-standard quality of life. But more
importantly, its capital, Paris, besides being one of the most attractive cities in Europe, is in a
strong position to become the main euro area centre for market activities, especially in the Brexit
context.
3. Paris' attractiveness as an integrated financial centre in a post-Brexit world
Brexit was and remains bad news mostly for the United Kingdom but also for Europe.
As for now, there is one principle which in our view is the corner stone of the future agreement
between the European Union and the United Kingdom - preserving the integrity of our common
good, the EU single market. In practice, it means that we cannot separate access and rules and
that UK based entities cannot get a European passport and access the EU single market if they
do not fully comply with the single market's rules and do not recognise the authority of the
European Court of Justice. The City of London will of course remain a major global financial
centre but will no longer be in the position to serve as the European financial hub. Against that
backdrop, further integration of capital markets in the EU is all the more needed. Succeeding in
that endeavour requires an integrated approach combining and coordinating the Juncker
Investment Plan, the Banking Union and the Capital Markets Union to achieve a true "Financing
Union for Investment and Innovation".
This Financing Union will be built on the EUR 390 billion in annual surplus savings in the euro
area.
Another consequence of Brexit is that a number of financial activities will be relocated within the
EU 27. The competitive landscape between financial centres will therefore change even though
we do not expect the emergence of a continental "City of London" but a more multipolar and
specialised competitive structure. It is our collective responsibility to foster a competitive and fair
ecosystem for international players; as we have a single rule book, this competition will exclude
any regulatory or supervisory "race to the bottom".
Against this backdrop, the Paris financial centre has many assets. Paris hosts one of the most
developed capital markets in continental Europe, the first asset management industry, a leading
bond market, the largest commercial paper market with NEU-CP and the largest private equity
investor in continental Europe. Moreover, Paris offers an attractive pool of highly skilled staff in
financial services. The French government and the French financial authorities, including
the Banque de France, are also working together to facilitating the dissemination of sound and
safe financial innovations and fostering the scaling up of sustainable finance. These investments
are protected by a very resilient banking system, accompanied by consistent regulation. Let me
remind you that Paris is already home to the European Securities and Markets Authority and will
soon host the European Banking Authority. In addition, the Paris Court of Appeal was granted an
international chamber last February, with international commercial affairs falling within its remit.
That will duly complete the Paris court organisation, which already includes an international
chamber in its commercial court. Last but not least, let me stress that the French authorities are
making sure that the Paris financial centre and its participants benefit from a streamlined and
business-friendly regulatory framework, for instance in areas such as bond issuance and
securitisation. Meanwhile, significant efforts have been made by the French government to
alleviate the tax regime and social contributions of "impatriates." Starting in 2016 under the
previous government, they have been amplified by the new one, including on the eve of the
business summit last January.
***
France is changing, for the better. But it is still dependent on its economic environment,
obviously. Let me conclude with two wishes. First: that Europe is courageous enough to
strengthen itself through this cyclical upswing. Combining more reforms in France and more
fiscal stimulus in Germany, as will happen, is welcome but not sufficient: we need a stronger
Economic Union in the euro area to avoid overburdening monetary policy by the next recession.
And second, that the United States and the G20 are clear-sighted enough to address their
economic challenges through multilateral answers, and not unilateral ones: here too, France is a
reliable partner.