Digital conference at the Bocconi University - 14 May 2020
European solidarity put to the test by the health crisis
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr), Déborah Guedj
(deborah.guedj@banquefrance.fr)
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Ladies and Gentlemen, cari professori e studenti,
I am delighted to share this moment with you. I would like to extend my warmest
thanks to all of those who made this virtual meeting possible in particular Rector
Gianmario Verona, and Vice-Rector Stefano Caselli together with Francesco
Daveri. To me, Bocconi represents a major source of influence for European
integration. Think of some great "bocconiani" who played a fundamental role in
building our Economic union: from Luigi Einaudi - the father of the fathers of
Europe - to my friend Mario Monti. I also want to honour the memory of
Tommaso Padoa-Schioppa who passed away ten years ago. In the difficult
times we are facing, his vision and ability to translate European ideals into active
fights - such as the euro - remain inspirational.
Today I stand before you as a committed European, a central banker, but also
a friend of Italy. I first and foremost want to express my deep solidarity: Italy -
like France - has been one of the countries hardest hit by the pandemic. I am
also well aware of the criticism about Europe being too slow or reluctant to help.
So my purpose today is a challenging one, as I will address the issue of Europe's
alleged lack of solidarity. I will first argue that in fact Europe - and the
Eurosystem at the frontline - has broadly risen to the challenge during this acute
phase of the crisis. But we need to do more, and I will then sketch the broad
outlines of an effective and collective exit strategy.
I. The Eurosystem at the front line of the European response during
the acute phase of the crisis
The lockdown measures have a major impact on the European and so on the
Italian economy, which - according to the European Commission - could
contract by 9.5% in 2020. Confronted with this unprecedented and totally
unforeseen crisis, the policy response of European Governments - including
Italy's - was immediate and strong.
But on both sides of our borders, there is a common temptation to blame Europe
for not doing enough. In reality, Europe is taking action, and more than has been
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acknowledged. The debate on "Coronabonds" has divided Europeans, but the
exceptional monetary action taken by the European Central Bank (ECB) - which
is much more significant - should bring us together.
In order to fulfill its mandate, the Eurosystem has always been clear in its
commitment to ensure appropriate financial conditions in all parts of the euro
area, and decisive in its action to fight fragmentation within the euro area. We
will not allow adverse market dynamics to lead to unjustified interest rate
increases in some countries, which would put at risk the smooth transmission of
our common monetary policy. To put it simply: yields and spreads do matter,
even if we don't target fixed levels. Hence, and consistent with the risk of still
lower inflation, we announced on 18 March a EUR 750 billion Pandemic
Emergency Purchase Programme (PEPP). In implementing the PEPP, we are
and will remain flexible; the Eurosystem should be guided more by market
dynamics and liquidity conditions than predetermined volumes of purchases.
And Italy is reaping the benefits of European integration as it borrows at a far
lower interest rate than before the euro.
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If Italy's sovereign bond yield spreads were as wide as before joining the euro,
- more than 3% higher than at present - it would incur an additional interest
charge of several billion € on the new debt issued in 2020, which includes the
costs of the Covid pandemic. If we apply this spread to Italy's outstanding stock
of debt, the additional interest cost would be several tens of billions of euro.
At the same time, the ECB has dramatically expanded its targeted longer-term
refinancing operations (TLTRO-3) in order to support bank credit for the real
economy. Less noticed, these new conditions are historically favourable, with
support by the ECB now increased to 50 bp under the Deposit Facility Rate.
This lending incentive will reduce bank funding costs by several billions of €
each year. The Italian banking sector - and through it, Italian businesses and
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households - is the main beneficiary of ECB refinancing operations with almost
30% of total credit operations outstanding.
This even leads some in other countries to argue that our monetary policy is
being conducted for the benefit of Italy: they are wrong. Monetary policy is not
conducted for any one country, be it Germany, France or Italy. The Governing
Council takes its decisions collectively and independently, taking into
consideration the euro area as a whole. That being said, let us simply
acknowledge that belonging to the Monetary Union has provided Italy with
substantial financial relief in this crisis. The ECB has worked well for Europe and
for Italy.
Our Governing Council took note last week of the judgement by the German
Federal Constitutional Court. Let me be crystal-clear: we remain undeterred, as
President Lagarde said; furthermore, we are definitely dedicated to and
determined to deliver on our mandate as conferred by the Treaty. As the
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European Court of Justice has said, our past actions are indeed proportionate
to that mandate.
More broadly, I hear debates in our two countries shedding doubt on (i) the
independence of the central bank - that should be brought "under political
control" - and on (ii) its mandate - which should go beyond price stability, to
include employment or the fight against the health crisis. Criticising these two
pillars is not only pointless, but is also dangerous:
• Pointless: the ECB was able, within its institutional framework and mandate, to
be active, innovative and responsive...even more than some political
institutions. Damage the central bank's independence and you undermine its
strength and agility, the very things that protect an economy in a crisis.
• Dangerous: these two pillars, enshrined in the Treaty, are the legal and
democratic foundation of our legitimacy and capacity to act - and not only in
"Northerners" eyes. Furthermore, they are the foundations of European's trust
in their currency. To give only one example: the Eurosystem cannot cancel
public debt, neither legally nor "fiduciary": a suspicion of fiscal dominance would
give rise to monetary distrust as seen in history and more recently in some
emerging market economies. Independence and the price stability mandate are
not an obstacle to the ECB's powerful action. On the contrary, they are its two
best levers. I will come back to this.
II. What European policies for the gradual exit?
Talking about European solidarity, arguably, Europe could have done more. But
let us not forget that the glass is at least half full, thanks to the major support
from the Eurosystem, but also the SURE framework of the European
Commission to help preserve jobs, and the welcome agreement last Friday on
unconditional ESM [European Stability Mechanism] credit lines to finance health
expenditure.
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Let us now look to the future. And do so together: the German Federal President
warned last month, "Germany cannot emerge from the crisis strong and healthy
if [its] neighbours do not also become strong and healthy"i. Of course the same
applies to, say, the Netherlands or Austria: selfishness today could come at a
high price tomorrow. And let me stress the utmost importance of Chancellor
Merkel's words precisely just yesterday: "This will encourage us to do more in
the area of economic policy, in order to further integration of the euro area. We
will address this issue in connection with what we call the Recovery Fund for
Europe".
A. Our common goals: recovery and repair
1/Supporting growth in the recovery phase is a shared objective for all of us
in Europe. There is indeed no magic bullet, and - at the end of the day - the
debt inherited from the crisis will need to be financed through growth and
through our work. As pointed out by my colleague and friend Governor
Ignazio Visco, "adequate investment in education is [...] needed to face the
uncertainty that surrounds the jobs and the skills that will matter in the future"ii.
Yet, in the face of such enormous upheaval such as the Covid-crisis, investment
at the national level will inevitably reach its limit. Facing the deep European
Investment and growth gap, we need to implement major European investment
programmes to bridge that gap while tackling common structural priorities such
as the fight against climate change which must absolutely not become a
collateral victim of the crisis, or digitalisation which will be even more than before
the key driver of future productivity.
2/ Preserving the single market while "repairing" firms is our second
common goal in the recovery phase. National governments did well in the acute
phase, by taking emergency measures such as providing guarantees and
liquidity support to their SMEs. But, as these measures will have to be prolonged
and transformed into long-term solvency measures, national differences could
create an "unlevel playing field". A single market - which is in the interest of all
Member States, starting with Germany - means common rules for corporates:
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if not, our economies risk further divergence and that would be very unfortunate.
The solvency of European business is our shared challenge, and calls for
shared solutions.
Focusing on these two objectives is more important than arguing about public
debt. But let me, for the sake of consistency, propose two basic principles:
Existing debts are and will remain the responsibility of national governments.
Let us stop this fruitless debate about Eurobonds and the mutualisation of past
debt. Fiscal consolidation will remain a national obligation - including in France
-, but with appropriate timing in order to avoid the premature and procyclical
tightening of public finances. On the other hand, future financing needs related
to "recovery and repair" should be the natural domain of European financial
solidarity.
B. Our common instruments : combining solidarity and responsibility
I believe that an "effective and collective exit strategy" should combine four
cornerstones of the European recovery - : (i) an ambitious "recovery plan" to
provide European financial solidarity, (ii) a clarification of fiscal rules ensuring
the responsibility of Member States, (iii) a Financing Union for Investment and
Innovation fostering "private risk-sharing", and (iv) an accommodative monetary
policy, against the backdrop of low inflation.
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a/ Regarding the first cornerstone, an ambitious "recovery plan", the
discussion so far has focused on its amount - it should be above EUR 1 trillion
which is roughly the expected loss of euro area GDP this year - or on its
structure: should it take the form of loans or grants? Let me answer clearly: it
should combine both. Hence, as agreed by the European Council on 23 April, it
will be crucial to combine the recovery fund with the next multiannual financial
framework - which should be increased.
But let us now discuss the content of the fund. First, it should target investments
that generate additional potential growth. Second, it should include a "European
value added", with positive cross-border spillover effects. Climate change,
digital technologies, research and development are good candidates if we know
how to be selective. "Technical" institutions such as the European Investment
Bank (EIB) could be entrusted, and possibly "pari-passu" with private money. If
it is a simple transfer of national investment funding already "in the pipeline",
there will be no gain, and we would even run the risk of losses, in the case of a
bad selection.
Beyond this "recovery" side, a "repair" side should address growing solvency
issues. The recent French proposal for a recovery fund foresees the possibility
of setting up an equity fund either to inject capital into key companies, especially
for those operating in European strategic value chains, as identified by the
Commission in November 2019. Beyond that, several economists - including
Elena Carletti, Professor of Finance at Bocconi University - have proposed the
promising avenue of a temporary "European Pandemic Equity Fund,"iii which
could be managed by the EIB. This could take the form of hybrid capital
instruments, with no voting rights but a significant remuneration of the public
investment, and a predetermined termination option for the firm. In addition, the
Recovery Fund could consider a specific tool to buy-back some assets from
banks.
b/ A clarification of fiscal rules. The counterpart of financial solidarity is the
responsibility of Member States. The current SGP [Stability and Growth Pact]
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rules - are at once too complex and not credible enough. Obviously, there is a
need to maintain fiscal rules - let me stress it, at the risk of unpopularity - but
for them to evolve towards greater clarity and better ownership and compliance
by Member States. The European Fiscal Board interestingly proposed relying
on a ceiling on the growth rate of primary public expenditure, net of discretionary
revenue measuresiv.
c/ Making headway with a Financing Union for Investment and Innovation.
Private risk-sharing mechanisms, which are less frequently considered than
public ones, are just as important and effective, as we can see in the US where
capital markets play a more important role as a buffer between states than fiscal
transfers. Here, solidarity and responsibility are mutually reinforcing. The euro
area has an abundant, and rarely mentioned, resource at its disposal: a savings
surplus relative to investment, which amounted to EUR 360 billion last year. This
resource is currently invested outside the euro area, even though our potential
investment needs are substantial.
A better allocation of European private savings requires more efficient cross-
border financing channels - savings are not always where the investment need
arises - and more efficient "transformation": preferred savings instruments are
often short-term and safe, while financing needs are often longer-term and
riskier. This requires the combination of a more effective Banking Union and a
"Capital Markets Union", to make a genuine "Financing Union for Investment
and Innovation". European governments all agree in principle; let us now at last
walk our talk, as a significant private booster to our collective exit strategy.
d/ Keeping in place an accommodative monetary policy, against the
backdrop of low inflation - 0.4% in April in the euro area. Most economists see
this shock as disinflationary and expect it to remain so in the next phase as
demand around the world recovers more slowly than supply. The IMF forecasts
inflation rates of 0.2% and 1.0% in 2020 and 2021 for the euro area. The
European Commission forecasts are roughly the same. Let me remind you that
our inflation objective of "below but close to 2%" is both symmetric and mid-
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term: it should not be a ceiling, nor completely ignore past inflation
developments. As I said, I fiercely stick to our monetary independence - and
oppose fiscal dominance -, and to our mandate focused on price stability. But
in the present context, this mandate does not prevent action: in the very name
of our mandate, we will probably have to do more, and maintain low interest
rates and abundant liquidity for longer. Nor does independence prevent
cooperation. On the contrary, the stronger the Economic Union - including its
budgetary and financial components - the more effective monetary action will
be. Take the example of the Federal Reserve in the United States which can
count on a strong fiscal and monetary policy-mix.
***
Over the past 20 years, the euro area has essentially forged ahead through
crises. Today it is facing another moment of truth. As a golden thread, famously
illustrated by Mario Draghi's "Whatever it takes" in 2012, stands the unlimited
commitment of the ECB to the euro. Alessandro Manzoni, one of the greatest
Milanesi, wrote in 1815 : « Liberi non sarem se non siam univ [Liberi non saremo
se non siamo uniti]». Today, we Europeans will not be masters of our own
destinies if we are not united. Let us now overcome the current "malinconia" and
face our challenges not with fear or distrust, but with pride. Pride in what we
have already achieved and pride in the future we want to shape. Thank you for
your attention.
i
Televised address by Federal President Frank-Walter Steinmeier on the coronavirus pandemic at Schloss
Bellevue, on 11 April 2020.
ii
« Education in the digital world », Speech by Ignazio Visco, Governor of the Bank of Italy, Centesimus Annus
Pro Pontifice Foundation - Seventh Consultation Meeting "Ethos, Education and Training: Avenues toward
equality and ethical behaviours in the digital era", Catholic University of the Sacred Heart, Milan, 31st January
2020
iii
Arnoud Boot, Elena Carletti, Hans-Helmut Kotz, Jan Pieter Krahnen, Loriana Pelizzon, Marti Subrahmanyam,
"Corona and Financial Stability 4.0: Implementing a European Pandemic Equity Fund" 25 April 2020, Vox, CEPR
Policy Portal.
iv
European Fiscal Board (2019), "Assessment of EU fiscal rules with a focus on the six and two-pack legislation",
août, Bruxelles. https://ec.europa.eu/info/sites/info/files/2019-09-10-assessment-of-eu-fiscal-rules_en.pdf
v
Alessandro Manzoni, in Proclama di Rimini, 1815.