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Warwick Economics Summit 4 February 2022
and twenty years ahead
Twenty years later...
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Press contact: Mark Deen (mark.deen@banque-france.fr)
Ladies and Gentlemen,
I am delighted to be with you today, though I would have preferred to actually
come to Warwick and your world-renowned University. And I am deeply
honoured to offer today, with this speech, the very first of the Persaud Lectures,
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launched this year by Professor Avinash Persaud none other than the son of
Professor the Honourable Bishdonat Persaud. I borrowed my title from the
Twenty Years Later
famous French writer Alexandre Dumas: was his sequel to
the Three Musketeers. January 1st marked 20 years since the introduction of
the euro as cash. And if central banking isn't quite as much fun as the tales of
d'Artagnan and his friends, our young currency has had a few adventures and
it is worth drawing some lessons from them. I will then turn to the next twenty
years and the two main transformations facing Europe.
Before I plunge into this longer view, allow me to say a few words about the
European Central Bank's latest monetary policy decision as set out by ECB
President Christine Lagarde. Yesterday, in the face of increasing uncertainty on
inflation, our key word was « more than ever » optionality. We take it seriously:
we retain our full optionality on the decisions we will make from March and in
the following quarters, informed then by the latest data, forecasts and
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geopolitical developments. And as we clearly stick to our sequencing starting
with first tapering and second lift off - we will also retain our full optionality about
the pace of this sequence, and timing of moving from one stage to the other.
Hence, while the direction of the journey is clear, one shouldn't rush to
conclusions about its calendar: it will remain gradual, state dependent, and open
in each of its steps.
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I. The outstanding success of the euro
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So back to the tale of the euro. You students are perhaps too young to
it's worth
remember the politics of the 1990s, but reminding ourselves of how
far we have come. When we recall that the European Union had only 12
members when the Maastricht Treaty was signed in 1992, we realize how much
the world has changed. Today the EU counts 27 members and 19 countries
have adopted the euro. The addition of Croatia and Bulgaria will soon bring the
latter number up to 21.
Along with this impressive progress, there was of course a significant loss: the
U.K. opted out of the single currency from the start and has more recently exited
the EU altogether. We continentals may regret those decisions but we respect
We'll miss great British architects of our projects, like
them. former Chancellor
Sir Kenneth Clarke, whom I can personally testify to how much he contributed.
What we do sometimes regret is when Britain's vibrant debate on European
issues verges on schadenfreude in relation to our own projects and ambitions.
Take, for instance, Sir William Cash, a long-standing Conservative Member of
Parliament, who at a debate on euro membership in 1997, insisted that "the euro
would be extremely weak" and "we are heading for disaster."
that Fourteen
that "the Euro with its one size fits all
years later, in 2011, Bill Cash wrote
approach and the uniformity demanded by the EU simply cannot work... The
survival of the euro itself is in question due to its structural shortcomings and the
inherent workings of monetary union."
Well, here we are, more than a decade later, and the euro is still alive and
kicking. Not only has the euro survived, but it is recognised and used globally,
including outside its own borders as both a store of value and a means of trade.
The single currency has also proved remarkably stable, with inflation averaging
1.7% since its inception in 1999, compared with 4.9% during the two decades
before. The euro has therefore helped to protect the purchasing power of
European citizens, which has increased by 15% since 1999.
Moreover, the euro is not simply an elite project as is frequently charged. It is
also a popular success; it inspires trust which is the core value of a currency.
The latest standard Eurobarometer poll conducted in spring 2021 reported that
79% of the population in the 19 countries using the euro believe that having the
currency is good for the EU. That's up from 66 percent a decade ago.
Even well-
known nationalist politicians, including in my own country, have dropped or
backed-off their anti-euro stances because they have concluded that the policy
is an electoral dead-end.
Obviously as Governor of the Banque de France and a committed European, I
enjoy reading out those numbers. Yet I do not wish to be simplistic or
Panglossian. The euro area has had problems over the years, most notably
resulting in the sovereign debt crisis in the early 2010s. That crisis was a
reminder that by forging a currency union before a political union existed, we
were doing something unprecedented.
Yet European political leaders have ultimately proved themselves to be
pragmatic, backing the European Central Bank in its defence of the euro.
Lessons were learned and when the Covid crisis hit in 2020, the EU gave the
region's economy appropriate fiscal
support. The combined stimulus provided
by the EU and national governments was comparable to that of the U.S. and the
U.K. Meanwhile the ECB did its part in supplying monetary stimulus also on par
with that of other developed countries.
There is, however, still progress to be made; our monetary and economic union
needs to be completed. Our European economic institutions are like a trimaran.
Our vessel already has a robust central hull in the form of the ECB and the
Eurosystem, with its credible single monetary policy. This boat must be
completed with two floaters.
On one side, we need a public float with a standing common fiscal capacity to
better cope with macroeconomic shocks. This need not mean increasing
permanently our yearly budget; rather we should construct a fiscal facility that
could be activated in moments of crisis or recession. In this respect, the EUR
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750 billion Next Generation EU programme agreed in 2020 and now actively
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implemented has been a major step forward. On the other side, we need a
private float to foster a better capital allocation, which is just as important. The
"boring"
Banking Union and Capital Markets Union, though somewhat and
technical, should be absolute political priorities to enhance the free circulation
suggest to rebrand a
of capital across the EU and build what I "Financing Union
for Investment and
Innovation". In the U.S., private capital flows are a major
financial shock absorber between states. We can achieve the same in Europe,
and make better use of the world's
largest pool of savings, including by fostering
venture capital which is still underdeveloped.
two "Great
All these initiatives are key to ensuring our capacity to finance the
transformations", ecological and
digital, that we will all have to pursue in the long
run. Both require very significant investments in the coming years and hence a
co-financing by the public and the private sectors: it is healthy to encourage
convergence of private actors with policy goals set by public authorities on these
collective issues.
Allow me here to turn to some great economists of the last century to shed some
light on these transformations. One of them is Joseph Schumpeter and his
creative destruction, and the decisive role of private innovation. But we shouldn't
forget Karl Polanyi and his "Great transformation", written in Britain and
a "Market
published in 1944. Polanyi warned of the dangers of changing
Economy" into a "Market
society", and hence of purely self-regulated markets
forgetting about social and political institutions. We might say that his ideas are
the structural side of what Keynes wrote on cyclical policies. To succeed in the
face of the challenges of both the modern economy and democratic discontent,
we will need to reconcile the ideas of these three great thinkers.
II. 20 years ahead: our two great transformations, ecological and digital
1/ I will start with the digital revolution, where Europe is still lagging behind the
United States and China. Compared to the United States, we spend less on
R&D, have fewer researchers and have filed fewer patents, particularly in
biotechnology and in information and communication technologies.
We nevertheless have reasons to cheer: in 2021 around EUR 100 billion were
invested in the European technology ecosystem, almost three times the
previous record of 2020, with around 100 new unicornsi. Furthermore, although
technologies have not yet shown their full potential in terms of productivity, we
may be at a turning point with the latest advances in artificial intelligence,
biotechnologies or telework-related reorganisations - after a lag which
corresponds to the process of appropriating these technologies by the economic
fabric (investment, training, etc.).
These disruptions are also reflected in the monetary, financial and payments
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spheres which we scrutinise as central banks and supervisors -, where
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digitalisation is bringing about a triple revolution and it is far from over:
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(i) First, the arrival of new players: new actors born from the tech world
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Fintechs and Bigtechs are challenging historical players with radically
new approaches to financial services and at present much less regulation;
(ii) Second, the emergence of crypto-assets from the blockchain
new assets:
universe in the form of tokens: they will never according to me be credible
as but could be used as settlement means -
"crypto-currencies", think of
stablecoins for instance;
(iii) Lastly, the emergence of decentralised market infrastructures: new
technologies tend to reduce the use of proven centralised settlement
systems.
These revolutions offer the potential for increased market efficiency while
reducing costs and time. But they entail several risks, and they could lead to
significant concentration effects among a few dominant private networks: these
would in practice
"re-intermediate", but without the trust and regulation
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associated with the architecture of the monetary and financial edifice that we
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public and private players have built together over a period of decades.
In the face of this major challenge, we need to both innovate and regulate. For
some, the conjunction between the two should be an
"or", considering them
mutually exclusive: innovation in the form of a central bank digital currency
would be an alternative, indeed the only alternative, to the unchecked
the conjunction is the
development of decentralised finance. For me, "and": two
pillars clearly work together to foster sustainable innovation; this is why the EU
should at once (i) adopt the MiCA regulation on crypto assets in the first half of
this year, (ii) prepare for a Central Bank Digital Currency, a e-euro, by 2026. But
"neither, nor": revolutions always happen
the worst conjunction would be
quickly, and we are at risk of neither innovating nor regulating in time. In that
case we would have failed in our historical mission and jeopardised centuries of
work building up confidence in our money.
2/ Let me now turn to the second major transformation underway, the
ecological transition, which is an absolute necessity at the global level even if
Europe here lies ahead. Climate change is accelerating. Beyond the COP26
held in Glasgow a few months ago, globally coordinated governmental policies
are therefore necessary to anchor concrete and credible commitments, such as
the one taken by the European Union in its Fit for 55 programme. And yes,
policies to fight climate change should imperatively include an appropriate
carbon price.
Rest assured that central banks will do everything they can do. The ECB
monetary policy strategy review, concluded last summer under President
Lagarde's leadership,
sets out an ambitious action plan leading up to 2024. But
central banks and financial intermediaries cannot solve everything, and
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substitute for adequate and sometimes difficult public policies.
The ecological transition holds risks, including on inflation as the gradual switch
to greener energies may entail higher and more volatile prices, at least in the
intermediate phase. Central banks are closely monitoring this debate about a
possible
"greenflation". So far, the evidence points to a non-negligible but limited
direct contribution of climate policy in the recent increase in inflation. For
example, the ongoing rise in CO2 prices in the European ETS market, which we
are already taking into account in our inflation projections, has a modest positive
impact on inflation. And the implementation of a carbon tax in Germany in 2021
has had a discernible impact in 2021: combined with other measures to tackle
climate change, the overall impact on German consumer prices was estimated
at 0.4 percentage point in 2021.
That said, climate transition is far from being the primary cause of the recent
surge in energy prices across the world. Indeed, it has more to do with a
combination of global factors: rapid demand recovery from the pandemic-
induced recession, supply disruptions, geopolitical tensions. And in the specific
case of Europe, the shock on energy prices is amplified by the run-up in
wholesale electricity market prices, due to a shortage in natural gas.
Afterwards, beyond our projection horizon, the transition to net zero might have
a more significant impact on inflation, especially if it were to be disorderlyii. The
net zero transition would then result into a negative supply shock, in particular if
the capacity increase in alternative energy sources were too slow. In addition,
the reallocation of demand involved by the transition might trigger relative prices
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changes in some sectors. The level of r* the natural interest rate could also
be affected in two opposite ways: higher green investments will increase it; but
a negative impact on productivity growth would reduce it. On many of these
questions, it's too early to tell. We need
urgently more analytical work on the
macroeconomic modelling of climate transition; more than ever, monetary policy
will remain a judgment exercise, looking through temporary phenomena while
averting lasting increases in inflation. Central banks will have to ensure that
these shocks on relative prices do not result into a lasting increase in inflation.
One thing is certain: the sooner we start the transition, the better to ensure long-
term sustainable growth and price stability.
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In economic and financial matters, there is always a degree of uncertainty. In
the word "espérance" has two meanings:
French, hope, and mathematical
"Espérance"
expectation. has been the driver for Europe and the euro, in both
its meanings. Daring decisions made by visionary men and women in the past
decades have proved winning bets. They were guided by the same conviction
as another French writer, Georges Bernanos, who wrote in 1941 in his Letter to
the English: "It is in my reason, not my heart, that lies the principle of my
invincible hope".iii I thank you for your attention.
i
State of European Tech Report, December 2021
ii
Schnabel, I., speech, "Looking through higher energy prices? Monetary policy and the green transition",
8 January 2022
iii
Bernanos, G., in Letter to the English, 1941