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Emerging Market Forum Paris, 16 May 2022
Welcome remarks: "Multipolarity and the role of the euro in the International
Financial System"
Speech by François Villeroy de Galhau,
Governor of the Banque de France
Ladies and Gentlemen,
It is a great pleasure to welcome you today in Banque de France premises for
Emerging Markets Forum. "Navigating in a fast moving and turbulent
the 15th
world"
certainly requires great skills, and recent developments in the
International Financial System remind us that it is currently all but smooth
sailing. We have seen disruption in the global value chains due to the still
ongoing pandemic. International trade may slow down or even contract if these
disruptions lead to a significant wave of re-shoring. Now the brutal war in
Ukraine has induced further supply disruptions and led our democratic leaders
to use financial sanctions in response.
In this uncertain situation, our first duty as a central bank is to provide
appropriate monetary policy. The consensus in our Governing Council is now
clearly emerging, as summed up by Christine Lagarde in her speech last
Wednesday i: to fight an inflation which is not only higher but broader, we now
have to normalise our monetary policy. I won't add my precise calendar
prediction to the many existing ones, but expect a decisive June meeting, and
an active summer. The pace of the further steps will take into account actual
activity and inflation data with optionality and gradualism, but we should at least
move towards the neutral rate ii. And let me stress this: we will carefully monitor
developments in the effective exchange rate, as a significant driver of imported
inflation. A euro that is too weak would go against our price stability objective.
More structurally, a key question is whether we are heading towards a
fragmented International Financial System, at the expense of smooth trade and
Despite the challenges, (I) we shouldn't
financial transactions? abandon, as a
"creative frontier" on the horizon, the
idea of cooperative multilateral
International Financial System and (II) we should definitely develop the
international role of the euro as a realistic step forward.
**
We shouldn't as a "creative frontier",
I. abandon, the idea of a
cooperative multilateral International Financial System
1. The reasons why the topic of a renewed IFS has progressively faded to the
background
Since the 1970s, not much has happened to the international financial system.
While the Bretton Woods system with fixed exchange rates and a gold anchor
disappeared when the convertibility of the USD into gold came to end, the new
international monetary system remained based on the USD. This dollar-based
system gradually incorporated greater exchange rate flexibility. It allowed for a
boom in trade and capital flows. In this context, the idea of a global currency did
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not prosper in the academic debates and even less so in policy discussions.
One recent exception stands out, to which I would like to pay a special tribute.
In 2010, Michel Camdessus launched the Palais Royal initiative. This initiative
sheds light on the shortcomings of the International Financial System, in
particular its global governance and an overreliance on a single central
currency. The initiative suggested a greater role for SDRs and enhanced
cooperation between the World Bank, the IMF and the G20.
However, other major projects have in parallel been assigned higher priority -
for instance the successful creation and development of the euro - or have been
dictated by necessity - for instance the strengthening of the global financial
safety net (GFSN) induced by the great financial crisis and then the Covid crisis.
That said, there have been significant progress such as the increase of IMF
resources, the two special drawing rights (SDR) allocations (including the last
one of 650 billion USD in 2021) and the creation of the Resilience and
Sustainability Trust (RST) on the 1st of May by the IMF, which will help deliver
the G20 commitment to rechannelling at least 100 billion USD of this allocation
to the countries in need.
2. The dangers of a fragmented financial system
But there are dangers ahead. We have to avoid shifting from a dollar-dominated
system to a confrontational non-system with, for instance, a dollar world
opposed to a renminbi world. We can all agree that such a fragmentation would
generate instability, notably creating the risk of runs from one currency to
iii
another. Competitive currency devaluations between the two world wars
created such instability, when the dollar and the pound were competing for
leadership. Fragmentation might also lead to the development of separated
payment systems with limited interoperability. And it could harm the GFSN (as
reserves could be less convertible) with, consequently, a misallocation of
China's
capital. Another current concern is reluctance to join the international
community cooperative debt treatment process, the Common Framework.
Finally, we all hope that the sanctions and other measures taken in an
emergency situation will be withdrawn after a peaceful settlement of the
geopolitical situation.
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In addition to this public or geopolitical fragmentation, there is a risk of
"private"
fragmentation through the disorderly development of crypto-assets,
among which the somewhat misnamed "stablecoins".
As demonstrated by the
turmoil on financial markets in recent weeks, they are possibly very unstable.
investments. But it's not
We have long stressed the risks of such speculative
enough: this must be taken as a powerful wake-up-call for a global regulation,
which is urgently needed. MiCA on the European side paves the right way.
Crypto assets could disrupt the International Financial System if they are not
regulated, overseen and interoperable in a consistent and appropriate manner
across jurisdictions. This is why I have spoken of the danger of fragmentation in
"cryptocurrencies" having
payments akin to the Middle Age, with so-called
limited constituencies and acceptance.
3. But do we agree about the solutions?
In principle yes: in order to avoid repeating past mistakes, we would need a
collective momentum towards a stable and market oriented multipolar
International Financial System. A more multipolar IFS would help deal with the
modern version of the Triffin dilemma: the supply of USD global safe assets is
limited by the fiscal capacity of the US, while demand for them is bound to
increase. It could also offer more monetary policy independence to Emerging
Markets, by reducing the influence of US financial and real cycles spillovers.
That said, the political conditions for such a major shift are not very favourable,
to say the least: imagining the US, China and other major emerging economies
converging today on a new IFS, while they didn't for decades, could appear
as
utopian. Let me be more positive: we need to keep this concept of a more
as a "creative
balanced multipolar system on the horizon, at least frontier".
And we Europeans need to be active and committed on what depends on us.
To move towards a more resilient global system, the euro should play a more
important international role. It is a currency in a jurisdiction with solid democratic
and stable institutions, including independent central banks and the rule of law.
The euro is relying now on a more than 20-year old solid track record of stability:
it is backed by a soft power based on the respect of international rules,
multilateralism and openness. The euro is also at the centre of broad
international trade links. It is at least a credible complement to the dollar as a
safe asset.
II. Promoting the international role of the euro as a pillar of monetary
cooperation
From the inception of the euro and during the last two decades, the Eurosystem
adopted a neutral stance with regard to the development of the international role
It does not belong to the Treaty's
of the euro. objectives: the euro was created
for internal purposes, to avoid exchange fluctuations within Europe and
accelerate economic convergence between Member States, not primarily to act
as an international currency. Economic developments since 1999 have
alleviated concerns voiced at that time about a potential loss of monetary policy
control in case of a swift internationalization of the euro. A stronger international
role of the euro would now be associated with more monetary policy autonomy
and reduced impacts of exchange rate shocks on inflation. After a decade in
existence, by the time of the GFC, the euro had become the second most used
currency globally. But since then its growth has stalled. Today it still accounts
for roughly 20% of global currency holdings in central banks as well as just short
of 20% of global debt and global loans. According to SWIFT data, almost 40%
of transactions are denominated in euro. It truly is the second most important
currency in the world after the dollar.
The European Commission has recently taken steps to further strengthen the
iv
role of the euro, which are most welcome. Among other things, the
Commission has launched the Capital Markets Recovery Package that
introduced targeted amendments needed to develop euro-denominated
derivatives for energy and raw materials.
1. Supplying euro denominated safe assets and enhancing Capital Markets
Union
An international currency is only as strong as the safe assets it can offer. The
euro sovereign debt market is still fragmented and only a few Member States
are issuing global assets in a sufficient quantity. In this regard, there have been
interesting recent developments in Europe. In June 2021, Europe launched Next
Generation EU (NGEU) which will raise over 800 billion euros through a joint
issue of European bonds. More broadly, the deepening of European Capital
v
Markets Union should, at end, be instrumental. It would help both for the
allocation of capital within the euro area and for the stability and balance of the
International Financial System.
Such an initiative is important as we face new policy challenges. The transition
to a greener economy will require immense financing, and the digital
transformation will also require both public and private investments. This all calls
for investments in global public goods to be increasingly managed at the EU
level.
Two open questions remain. How do we solve the Triffin dilemma and what role
will Europe play in the Global Financial Safety Net (GFSN)? A more international
euro will provide increased options to store global liquidity, but the goal will
obviously not be to turn the euro into a dominant currency. On the contrary, we
would aim for reliance on multiple currencies to offer stability to the International
Financial System through diversification of risks.
Regarding the global safety net, the euro area generated a quantum jump for
the regional layer of the GFSN in creating the European Stability Mechanism
(ESM). In addition, the euro area countries were instrumental for the
strengthening of the IMF resources and the SDR allocation and rechannelling.
The weight of the euro in the SDR basket should increase in the future in
proportion of the increase of its international use. Finally, the Eurosystem is
already providing international liquidity through existing swap lines and repo
facilities with other central banks, and stands ready to do more if and when
warranted.
2. Invoicing international trade
With the EU ranking as the world largest trading block, the euro has ample
margin to improve as an international trade invoicing currencyvi. The choice of
invoice currency is a complex and largely private phenomenonvii, partly driven
by the structure of global value chains, which are being reshuffled. Developing
as an invoicing currency, for instance in energy markets or in the context of free
trade agreements, would be important steps to gain a global role.viii Indeed, it
would create the need to store euros for future trades, and consequently lead to
the development of a full range of euro-based financial tools.
3. Safeguarding cross-border payments by technological advances in
international financial infrastructures
The euro area should remain on the frontier for cross-border payments,
including the G20 agenda adopted in October 2021. The G20 roadmap for 2027
has indeed committed to bring profound improvements in this area including in
setting ambitious targets on costs, speed, and accessibility of cross-border
payments. But the challenge for all the stakeholders, central banks, regulators
as well as the private sector, is to deliver and ultimately meet the expectations
of end-users. This remains a strategic priority for the Banque de France, which
in parallel has paved the way for a more prospective solution: namely a
wholesale CBDC that could be issued by the Eurosystem, deploying
experiments such as the Jura project of cross border wholesale payments in
coordination with the BIS and the Swiss National Bank.
**
In the 1960s, US Secretary of Treasury Henry Fowler warned that "Providing
reserves and exchanges for the whole world is too much for one country and
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one currency to bear." To Fowler, we answer: "We in the euro area are happy
I thank you for your attention
to help." and I wish you a good forum.
i
Lagarde, C., Challenges along Europe's road, speech, 11 May 2022
ii
Villeroy de Galhau, F., The Eurosystem and its monetary policy: from an "impossible dilemma" to a possible
roadmap for normalisation, speech, 6 May 2022
iii
QJE paper by Fahri and Maggiori (2018)
iv
See the Council conclusions on achieving the EU's economic and financial strategic autonomy in an open
economy: one year after the Commission's Communication.
v
Villeroy de Galhau, F., Capital Markets Union: unleashing Europe's potential, speech, 30 November 2021
vi
ECB report on RIE : only 60% of extra-euro area exports of goods were invoiced in euro in 2020
vii
Recent research by Amiti, Itskhoki and Konings (2020)
viii
See the document Trade and investments in energy in the context of the EU common commercial policy
ix
Quote available here https://www.imf.org/external/np/exr/center/mm/eng/mm_sc_03.htm