-
Economy day 2019 Volksbanken Raiffeisenbanken Frankfurt, 14 November
2019
The future of the European Economic and Monetary Union
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr; 06 88 56 54 03).
Ladies and gentlemen,
I am very pleased to be here with you and wish to thank you for your invitation.
It's almost like a home from home for me here: I visit Frankfurt at least twice a
month for ECB Governing Council meetings! I should add that I myself worked
as a retail banker for 12 years. Today I am also speaking to you as a committed
European and a friend of Germany. I am French but my family roots are in
Saarland. My family has lived there since the end of the 18th century and its
Villeroy & Boch, is part of the German "Mittelstand".
ceramics company, I love
Germany, its language and its culture.
The impressive number of participants in today's event is testament to the vitality
of the Volksbanken Raiffeisenbanken. Through their ideas, Friedrich Wilhelm
Raiffeisen and Hermann Schulze-Delitzsch [founder of the Volksbanken]
influenced many cooperative banking initiatives in Europe and throughout the
world. The cooperative model has proved its resilience, first and foremost
because it inspires confidence over the long term. These two core values of
confidence and stability are also what characterise our single currency, the euro.
This year it celebrated its 20th birthday. However, to optimise its benefits
objectively, we need to overcome four clichés. I shall then turn to your banking
industry and its three key challenges for tomorrow.
**
I. Overcoming four clichés in order to optimise the euro area.
I am fully aware of the criticisms and debates that exist here in Germany about
the functioning of the euro area. Not everything is perfect; but Germany can be
proud of having helped to create an internationally recognised currency inspired
by its own core values: independence, respect for Treaties, price stability and a
long-term approach. The ECB and the euro are the true descendants of the
Bundesbank and Deutsche Mark. But today, if we want to move forward with a
serene debate, we need to get rid of four clichés.
The first one that needs to be overcome, including by some in my own country,
is the somewhat lazy idea that
economic union is a substitute for national
reforms. I want to make this clear from the start: on the contrary, national
reforms are a prerequisite for reinforcing the economic union. I am saying this
as a completely independent central banker; the current French government is
taking reforms very seriously. France has already reaped the first rewards:
- -
strong job creation 1 million new jobs in the past four years is lowering
- -
unemployment; growth forecast at 1.3% this year is proving more resilient
than in the rest of the euro area. And France has become a very attractive
country for foreign investors.i We need only look around us: in this regrettably
turbulent world, there is no more reliable partner for Germany than France, and
for France than Germany.
- -
This is why and this is the second cliché we need to stop reducing the debate
"German rules" and "French
to an old opposition between spending". In the
face of German fears, which I understand, I want to make a clear pledge: there
is no question in my eyes of creating a "transfer union" that would only benefit
certain countries, or of creating eurobonds that would equate to a pooling of
debt. Need I remind you that France is also a net contributor to the European
budget and that its public deficit is well below the 3% ceiling? But in light of the
current deterioration in the economic outlook, those countries with the fiscal
"act in an effective and timely manner", according to the ECB
space should
Governing Council which was unanimous on this point in September. Economic
studies show that public spending has a bigger impact on the economy when
three conditions are met: (i) when spending is focused more on productive public
investment, such as infrastructure and R&D, than on current expenditure; (ii)
second, when monetary policy is close to the interest rate lower bound, as there
is less crowding out of private investment; (iii) and last, when countries have low
levels of public debt. These conditions are currently met in a number of euro
area countries, especially Germany.
Allow me to add a paradox that is not sufficiently well known: to get out of the
current low rate environment, we should not turn instinctively solely to monetary
- -
policy as many do. In advanced economies, the natural rate of interest the
-
level that equates savings with investment over the long run has fallen by
around 2 percentage points in the last 20 years, and monetary policy has a very
limited impact on this rate. Instead, what we need is to change the underlying
economic factors driving the decline in the natural interest rate. Changing these
factors means spending on investment and on the future, including on training
and education, the energy transition and of course new technologies, with the
aim of lifting long-term economic growth. If we want higher interest rates in the
future, we must not be afraid to rapidly put in place targeted fiscal and structural
policies.
This brings us to the third cliché: other countries have gained more from the
euro than we have. Unfortunately, this cliché is repeated everywhere, including
in Germany.ii It is also paradoxical given that support for the single currency is
-
currently at an all-time high in the euro area 76% of European citizens support
the euro, and the figure is even 81% for Germany. In reality, the euro has
- -
benefited all countries, including and especially Germany. German inflation
has been lower under the aegis of the ECB in the past 20 years than in the two
preceding decades: 2.9% on average from 1979 to 1998 compared with 1.4%
since 1999. The permanent stability of exchange rates between our economies
is an undeniable advantage for German exporters: in 2018, 36% of German
exports were to euro area countries. The low level of interest rates is itself partly
a reflection of Germany's large savings surplus. And Switzerland, another
country that is in surplus but that is not part of the euro area, has to apply interest
rates that are even more negative! Let us be in no doubt: the euro is an asset
and not a burden for Germany.
the ECB's monetary policy has
This brings me finally to the fourth cliché:
"memorandum"
betrayed its mandate. This idea was propagated in a recent
by a number of former central bankers. I have every respect for them as people,
but I disagree with their argument. They unfortunately chose to ignore the
positive results of non-standard monetary policies. Jean-Claude Trichet himself,
who can hardly be accused of laxity, underlined these benefits, and I would just
like to remind you of them: estimates of the effectiveness of the ECB's policies
put the impact on growth at around 2.5 percentage points and the impact on
inflation at between 1 and 1.5 percentage point for the period 2014-18. What is
more, since 2013 the euro area has created 11 million jobs. You may not like
low rates; indeed the markets anticipate, reasonably in my view, that short-term
rates are close to bottoming out. But there can be no doubt about two very real
facts that unite us on the Governing Council. Our decisions are guided solely by
our mandate of price stability, in the face of inflation that is currently too low at
-
less than 1%. Given the recent slowdown in economic activity starting with
-
Germany these low short-term rates must and will remain in place: it would
undeniably be a mistake to raise ECB rates now. We are all realists here, so we
should focus on two issues:
The first is clarifying the definition of the ECB's inflation target, and
- above all
-
sharing it better with economic agents businesses and households. This is
crucial to allow them to better adjust their inflation expectations; that is
precisely the aim of the strategic focus we are going to launch with Christine
Lagarde.
- The second issue is limiting the negative effects of low rates on financial
stability, and in particular on banks and insurers. We do not lack the tools to
-
do this you with your strategic adaptation, and us with our
"macroprudential" policies.
But this brings me to my second part.
II. Meeting three major challenges to strengthen euro area banks.
I would like to share with you a strong belief: Europe needs strong banks. A
dynamic economy requires a strong banking industry; it's true in France, and it's
also true in Germany. Undeniably, euro area banks are stronger than they were
ten years ago. As a result of regulations and of their streamlining efforts, they
were able to significantly shore up their balance sheets. In particular, their
solvency and liquidity have improved, while the weight of NPL has drastically
declined: their Common Equity Tier 1 ratios (CET1) rose from 9% at end-2009
to 14.6% in June 2019. In addition, the major German banks themselves have
seen their NPL amount fall more than twofold over the past five years, sliding
from EUR 81 billion at end-2014iii to EUR 33 billion at end-March 2019. Euro
area banks are nevertheless experiencing a serious problem of profitability,
which is a cause for concern, both for you and us. I would like to outline three
challenges that are often mentioned in this regard: low interest rates, the digital
challenge, and consolidation.
Let's start with the subject that is perhaps the most obvious to you: low interest
rates. Negative rates are not an end in themselves, and we, as central bankers,
are aware of the difficulties this represents for banks. However, I would like to
qualify this statement. First, the effect of monetary policy on banks is not limited
to exerting pressure on the net interest margin. It is broader and also has
positive aspects that are too often overlooked: lower financing costs; a lower
cost of risk due to borrowers' improved solvency. Furthermore, in September,
- -
we decided and I had advocated this to set up a mitigation mechanism,
known as tiering, which exempts some of your excess reserves from the
negative rate. Germany is the euro area country whose banks have the largest
liquidity surplus: tiering will therefore first benefit German banks, for several
hundred million euros. This is good news; it hasn't been much talked about and
this is why I am particularly keen to welcome it with you. I also note that a number
-
of countries such as Denmark, Sweden and even the Netherlands in the euro
-
area display negative interest rates, but significantly higher bank profitability
-
ratios than those of euro area banks an RoE of 9-11%, compared to 6% in the
euro area. Negative rates are not the only problem. More structural problems
must also be solved.
This brings me to the digital challenge. The digital transition is an important
strategy for reducing costs. Financial institutions can unleash productivity gains
by exploring even further the possibilities of automation and artificial intelligence.
However, in the short term, IT investment costs are significant, while potential
profitability gains can only be generated in the medium and long term. This
challenge is even more complex for medium-sized banks, and those that do not
- -
have sufficient financial capacity. The costs of digitalisation in investment
are mostly fixed; its gains increase in proportion to size.
This brings me to the third challenge, that of the consolidation of banking
institutions in the euro area. Because of a still incomplete Banking Union, the
European banking sector remains too fragmented compared to the US market:
the market share of the five main European banks stands at 20% against more
than 40% in the United States. In this regard, I would like to applaud the open
approach of the Federal Minister of Finance Olaf Scholz. Beyond the debate on
deposit guarantees, which in my opinion calls for a pragmatic compromise rather
than a political confrontation, his merits are threefold: first, advocating European
financial sovereignty after Brexit; this requires adding a stronger Banking Union
and a Capital Markets Union. Second, proposing a common bank liquidation
procedure, in order to deal more rapidly and effectively with failing banks.
Finally, overcoming the blockages of "host countries" of subsidiaries, in order to
facilitate the constitution of European cross-border banking groups, including
when the parent company is German. Of course, many things still need to be
negotiated, notably the necessary reduction of risks. But the Scholz proposals
are putting back in motion this key issue for the solidity of the euro area and the
smooth financing of investment.
Of course, there exists a diverse range of consolidation models across Europe,
and in this movement, small banks must not relinquish their values. In this
respect, your central body DZ Bank seems to me to be a good example of a
grouping which ensures a geographical and functional complementarity of
activities. I welcome the current debates on how to consolidate networks of
cooperative and mutual banks in Europe; the German sector has the means of
significantly contributing to these debates.
**
Thanks to you, I have discovered Raiffeisen's beautiful phrase: "Several
persons have the ability to do what is impossible for one individual."iv
This
phrase perfectly describes the ambition of mutual banks. But it is also, I believe,
a model of thought for Europe. In this uncertain world, shaken by the rivalry
between the United States and China, Germany and France must, more than
ever, overcome their differences. The entry into office of the new European
Commission, around Ursula von der Leyen, must be an opportunity to move
forward together. It's now, or never. Europeans expect no less. Thank you for
your attention.
References:
i
"Shock Resistant", France's Attractiveness Survey, EY, June 2019.
ii
Laurent Abraham, Jean-Baptiste Gossé, "The euro: is the grass always greener on the other side?", Banque de
France blog, May 2019.
iii
EBA source and sample.
iv
"Was dem Einzelnen nicht möglich ist, das vermögen viele."