Conference "The internationalisation of the euro and the creation of the EU
Capital Markets Union" - Paris, 16 June 2023
The euro as a complementary asset in a more multilateral system
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
It is a great pleasure for me to be with you today for this conference on the
internationalisation of the euro and the creation of the EU Capital Markets Union.
I would like to warmly thank the Robert Triffin International (RTI) association and
the European League for Economic Cooperation, and more particularly Bernard
Snoy, for their invitation.
I will begin by discussing the monetary policy decisions taken yesterday by the
Governing Council (I), before getting to the heart of the matter of today's
conference. Powerful forces are pushing for greater diversification within the
international monetary system (II). The euro must now play its full international
role, in order to assert itself as a complementary anchor towards the "creative
frontier" that a truly multilateral international monetary system (IMS) would one
day represent (III).
I. Monetary policy
We decided yesterday a 25 basis point increase, in line with the slower pace
adopted early May. And our future decisions will be data driven, meeting by
meeting. Hence nobody should rush to a premature conclusion about our
calendar nor about our terminal rate, and the latest market volatility seems
somewhat excessive. Let me stress two elements in this direction:
• We are data driven, we are not forecasts driven. And recent data show
that even if we are obviously still far from the inflation target, our monetary
policy is at work, and is working : inflation has peaked in the euro area,
core inflation has declined for the second consecutive month, and there
are several other signs that underlying price pressures are softening.
According to yesterday's inflation forecast, which is a rather cautious one,
inflation should be at 3 % in the euro area by the end of this year, and at
2% by 2025: we are confident that we will deliver on our inflation target in
the next two years.
• We have already shown our determination on interest rates through this
overall 400 basis point increase. We obviously covered most of the
ground, and we are clearly in restrictive territory on all maturities: the key
issue now is the transmission of our past monetary decisions, which is
proceeding forcefully to financial conditions but could take up to two years
for its full economic effects. Hence, the duration matters more than the
level; persistence matters more than the peak.
II. Forces pushing for greater diversification in the IMS
Despite the end of the Bretton Woods system in the 1970s, the US dollar still
plays a dominant role in the international monetary system (IMS). Nevertheless,
the gradual decline in its share of global foreign exchange reserves, which
began in the mid-2010s, has gained momentum since 2020, and we are
witnessing a renewal of the debate on the dollar's continued role as the anchor
of the IMS.
Let's not be naive: geopolitical forces are powerfully at work, all the more so
since Russia's invasion of Ukraine in early 2022. China, the world's second-
largest economy, has been expressing its wish to internationalise the renminbi
for several years now; this has already materialised in its tradei and could
accelerate over the next few years. In particular, the climate transition will lead
us to reduce our consumption of fossil fuels and considerably increase our
consumption of resources for generating cleaner energy. As a result, we are
likely to witness a profound reconfiguration of international trade and financial
balances and, potentially, of the balance of power between currencies. China,
for example, has positioned itself at key points in supply chains, and has a very
dominant, even hegemonic, share of certain finished products.ii
The use of the Chinese currency is on the rise: in 2022, 7% of transactions on
foreign exchange markets had a renminbi leg,iii a figure twice as high as in 2019,
thanks in particular to the offshore centres created since 2010. China also plays
a major role as a bilateral creditor - with outstanding loans estimated at more
than USD 350 billion,iv i.e. more than the World Bank - and even, in some cases,
as a lender of last resort,v outside the framework of the International Monetary
Fund (IMF) and any collective rules. However, the renminbi's share is likely to
remain small, even in the medium term: its internationalisation will be structurally
held back by its very limited convertibility.vi
More broadly, the BRICS - in particular President Lula's Brazil - are expressing
their wish to de-dollarise their economies, or even to create a common currency.
Utopia? European countries, while having shared foundations, know better than
anyone how long it would take to give birth to a single currency. Nonetheless,
these political premises call for vigilance, because they would lead to
fragmentation rather than monetary diversification, but also because they
resonate with other, more economic arguments.
Other, shorter-term forces are at work. The supply of safe global dollar-
denominated assets depends on the United States' fiscal capacity, while
demand for these assets is set to grow. Yet, the recurring US debt ceiling crisis
- this year was particularly acute - may erode international investors' confidence
in dollar-denominated assets, making Triffin's dilemma more topical than ever.
In addition, the fight against inflation in the United States has led the Fed to
rapidly raise its rates since 2022, which has potentially difficult consequences
for the financial stability of the many countries that are de facto dependent on
the US dollar.
All these forces could lead to changes to some of the balances of the current
international monetary system. Admittedly, despite its gradual erosion from
around 65% in 2016 to 58% in 2022, the weight of the dollar is likely to remain
strong in the medium and long term.vii However, many currencies, including not
only the euro but also the Canadian and Australian dollars, are already being
increasingly used as reserve assets. A collective move towards a more
multipolar international financial system therefore seems to be underway.
However, a confrontational (non-) system, or disorderly fragmentation, would
only lead to instability and inefficiency.viii In order to increase monetary
confidence, we also need to preserve certain virtues of the current IMS: stable,
based on collective rules, market-oriented, and that offers widely accepted safe
assets.
III. The euro as a complementary asset for a more multilateral IMS
We Europeans must be proactive and involved in what depends on us: the euro
should play a greater international role. It is already the second most widely
used currency in the world, but its current weight, around 20% by most
measures,ix
does not reflect its potential. As an emblem of the qualities of the
type of IMS one would wish for, it is the currency of a jurisdiction with strong and
stable democratic institutions, independent central banks, the rule of law and
deep financial markets. It is supported by a soft power based on compliance
with international rules, multilateralism and openness. The euro is also at the
heart of vast international trade links. It now boasts a solid track record spanning
nearly 25 years, making it a credible complement to the dollar as a safe asset.
Objectively, one challenge remains: some may consider that the euro has
become a sort of geopolitical proxy for the dollar since Europe decided - for
excellent reasons - to take part in the sanctions against Russia. For my part, I
have noted that investors rightly continue to see the euro and the dollar as two
very distinct currencies.
If it is to assert itself even more firmly as one of the anchors of the IMS, the euro
must benefit from support which the Commissionx has begun to provide, notably
through stimulus measures via capital markets.xi In my view, this support must
now be relayed by the ECB and all of us, the central banks of the Eurosystem.
Since the introduction of the euro, the Eurosystem has adopted a neutral stance
regarding the development of the international role of the euro. Admittedly, this
role is not one of the objectives of the Treaty: the euro was created for internal
purposes, and not primarily to act as an international currency. But the fears
expressed at the time of a potential loss of control over monetary policy are no
longer justified; a strengthening of the international role of the euro would now
even be associated with greater autonomy and a reduced impact of exchange
rate shocks on inflation.
One of the main levers for action is to increase the supply of safe euro-
denominated assets. The launch in 2021 of the Next Generation EU (NGEU)
programme will raise EUR 800 billion. Above all, the unified approach to
financing EU borrowing, which was introduced by the Commission in 2023,
means that bondsxii can be issued under the single name of "EU bonds", which
has the advantage of avoiding fragmentation and boosting the liquidity of issues.
But I believe we need to go further, by aiming to bring together the bond issues
of the Commission, the European Stability Mechanism (ESM) and maybe the
European Investment Bank: the total pool would then amount to EUR 1,100
billion. We also need to speed up the implementation of the Capital Markets
Union (CMU), which is crucial for ensuring a better allocation of capital within
the euro area: this internal integration priority also serves the euro's external
role.
These first, realistic steps are the only advances within our reach at this stage.
They should not divert our attention from the "creative frontier"xiii
that a truly
multilateral financial system would represent. The ultimate goal remains to lead
the IMF to become a more universal, accessible and agile lender of last resort.
This would require adjusting the IMF's role and financial capacity in the global
financial safety net, to better reflect the new global economic balances and
prevent some under-represented countries from taking or pursuing more
unilateral routes.
* *
Allow me to conclude with a broader observation: Europe has often originated
from internal motives - prosperity and peace between its members - which it has
then been led to "internationalise", gradually asserting itself as a power of
economic and commercial diplomacy, security... and potentially as a monetary
anchor. We Europeans are often modest and cautious in these matters,
sometimes excessively so. But this multipolar world needs new multilateral
skills... and who better than us Europeans to bring them to life and nurture them?
Yes, the world of 2023 needs Europe. Thank you for your attention.
i
In particular in its raw materials and energy sale and purchase contracts, see for example, China's agreements
with Brazil, Argentina and Saudi Arabia, and Total Energies' first renminbi-denominated contract for the sale of
liquefied natural gas in March 2023. According to The Economist (20-26 May 2023), the renminbi's share of
trade finance has risen from 2% to 4.5% since February 2022.
ii
Voir notamment Solar PV Global Supply Chains, Agence internationale de l'énergie, juillet 2022
iii
Triennal Central Bank Survey of foreign exchange and Over-the-counter (OTC) derivatives in 2022, Bank for
International Settlements (BIS)
iv
Horn, S., Reinhart, C., and Trebesch, C., China's overseas lending, Journal of International Economics,
November 2021
v
Horn, S., Parks, B., Reinhart, C., and Trebesch, C., China as an International Lender of Last Resort, National
Bureau of Economic Research, 2023
vi
Eichengreen, B., Macaire, C., Mehl, A., Monnet, E. and Naef, A., Is Capital Account Convertibility Required for
the Renminbi to Acquire Reserve Currency Status?, Centre for Economic Policy Research, 2022
vii
See in particular Weiss, C., Geopolitics and the U.S. dollar's future as a reserve currency, International Finance
Discussion Papers, Federal Reserve, October 2022
viii
Farhi, E., and Maggiori, M., A Model of the International Monetary System, Quarterly Journal of Economics,
2018
ix
The international role of the euro, European Central Bank (ECB), June 2022
x
Council Conclusions on the EU's economic and financial strategic autonomy: one year after the Commission's
Communication, 29 March 2022
xi
Capital Markets Recovery Package
xii
For example, to finance the NGEU recovery programme and macro-financial assistance for Ukraine.
xiii
Villeroy de Galhau, F., Multipolarity and the role of the euro in the International Financial System, speech, 16
May 2022