Hearing of François Villeroy de Galhau,
Governor of the Banque de France
before the Section for the Economy and Finance of the French Economic,
Social and Environmental Council
Paris, 8 April 2020
"From the
emergency crisis response to initial thinking on the post-crisis
environment"
Press contacts: Mark Deen (mark.deen@banque-france.fr) and Deborah Guedj
(deborah.guedj@banque-france.fr)
Madam President, Vice-Presidents, Section Members
Thank you for this "virtual" invitation, which is nevertheless essential to
maintaining a productive dialogue on the economy between our two institutions
during this crisis: the Banque de France is fully mobilised in the economic battle
to support our businesses, and, of course, representatives of civil society such
as yourselves are following the situation extremely closely. This afternoon, I will
briefly present the findings of our monthly business survey published today. It is
the first French survey to analyse the economic impact of the first fifteen days
of lockdown. I shall then turn, in greater detail, to the economic policy responses:
those introduced in the short term, for which there is a solid consensus, and
those that will have to be devised once we emerge from the crisis. In this
respect, questions remain open.
**
of the Banque de France's monthly business survey: a
I. Findings
substantial economic cost
In 2019, the French economy was defined by its as it better resisted
resilience,
the economic slowdown than its European neighbours, particularly Germany. It
is now feeling the full force of a severe shock that is impacting both supply and
demand.
Our monthly business survey of 8,500 businesses carried out between 27 March
and 3 April illustrates the effect of the lockdown measures that have been in
force since 17 March. The measures have had a major impact on business
activity, which was down by 32% in March, and consequently on our quarterly
GDP growth estimate which was down by around 6% in the first quarter.
In all sectors, activity is dropping, and in most cases, dramatically. This decline
is not solely the result of the context in France. Orders from abroad have also
been badly hit, as the epidemic is affecting the majority of French businesses'
major trading partners.
In industry, the automobile, metallurgy, and machinery and equipment
manufacturing sectors were the worst affected by the decline in activity. For
industry as a whole, the capacity utilisation rate fell from 78% in February to
56% in March, which is the lowest rate ever recorded in the survey. In
services,
the greatest slump was seen in accommodation and catering. Construction
sector activity also deteriorated significantly, as a number of construction
projects were put on hold at the beginning of the lockdown period (Slide 3).
In short, at the end of March, the economy was running at two-thirds of its normal
"costs" us
pace. This means that every two weeks of lockdown approximately
1.5% of lost annual GDP and at least 1% of additional government deficit.
II. Building the appropriate economic policy responses
2.1 The emergency: rapid, strong and convergent responses during the crisis
Confronted with this unprecedented, and totally unforeseeable crisis,
rapid,
strong and convergent responses were implemented across the board in
fifteen days to stem the effects of a severe economic shock. The lessons of
2008 have not been forgotten. Seldom has there been such a solid consensus
on the direction and the scope of the measures to be taken, including among
economists, which is quite rare. In France, we have put in place a shield to
protect businesses of all sizes and to help them get through this shock, which in
turn protects their employees. This "cash shield" is fashioned from both
unprecedented fiscal and monetary measures.
The fiscal measures put in place by the government primarily revolve around
deferring payments of taxes and social security contributions, a solidarity fund
-
for the self-employed and above all initiatives for those in partial employment
formerly referred to as "technical unemployment", but we have fortunately
inverted that description. France has thus learned from the success of Germany
-
Kurzarbeit
and its in 2009. Our arrangement currently the most generous and
-
costly in Europe should avoid what has started to happen in the United States:
ten million job losses in fifteen days and possibly a lot more tomorrow; it protects
employees and their incomes and maintains production capacities for the future
recovery. The measures also include state-guaranteed loans, up to a total of
EUR 300 billion, repayable over one to five years and for an amount covering
up to 25% of annual revenue. Overall, banks are playing their part, but the Credit
Mediation Scheme's services, under the
aegis of the Banque de France, are
involved and ready to assist any businesses experiencing difficulties. Already,
each week we are receiving over ten times more cases than last year.
I will now turn to the monetary measures of this cash shield. All over the world,
the major central banks have taken bold measures to guarantee financing for
businesses in the short term, through purchases of commercial paper, and in
the medium term, through purchases of corporate bonds.
In this respect, the ECB was among the first to lead the way. The ECB also
stands out in that it has the capacity to provide banks with immediate and
almost unlimited liquidity, so that the banks can in turn finance all the
economic players: businesses, government and households. To do so, during
the course of two successive meetings the ECB took some exceptional
decisions. The decisions taken on 12 March, which were said to have missed
their target, have often been compared unfavourably with the successful
"package" of 18 March. However, I want
to stress that they are complementary.
-
On 12 March, the ECB decided to make almost EUR 3,000 billion 1⁄4 of euro
- through "TLTRO III" operations that provide
area GDP available to banks
refinancing at a negative interest rate (that can be as low -0.75% if banks at
least maintain their stock of outstanding loans) for an amount of up to 50% of
lending to the economy, essentially to ISEs and SMEs. On 18 March, we further
decided to launch an exceptional asset purchase envelope of EUR 750 billion
for those that obtain their financing through the markets, namely governments
and large corporations. This totally unprecedented Pandemic Emergency
Purchase Programme (PEPP) aims at avoiding a positive shock on long-term
interest rates associated with the exceptional expense of the public health crisis.
It also comes on top of the EUR 300 billion of asset purchases that had already
been planned. Also unprecedented is that the ECB has thus accorded itself
flexibility, where necessary, on three fronts: between public and private sector
securities, between countries for public sector securities, and with regard to the
issuer holdings limit of 33% on each public sector security.
The Eurosystem also decided, quickly and forcefully, to activate its macro- and
microprudential levers to help euro area financial institutions optimise their
capacities to finance businesses. We have taken this step not because banks
are weak but because they are in fact strong. Unlike in 2008, the banks are not
the weak link in a crisis which this time is of public health; a crisis which is
economic, but, at least in terms of its causes, non-financial in nature. This is
notably the result of the regulations that we have implemented and reinforced
over the last ten years. And it is what now gives us greater leeway to ease
certain capital requirements, such as the counter-cyclical buffer, and to push
back the entry into force of the Basel III accords by one year to 2023.
- -
All these measures should be considered in light of the often heated
discussions on the degree of financial solidarity in Europe. Arguably, Europe
could perhaps do more, but let's not forget that it is already doing a great deal,
-
thanks to major efforts from the Eurosystem or the easing agreed quickly and
-
unanimously of the Stability and Growth Pact, which gives natural priority to
national action. If we consider a possible role for the European Solidarity
- -
Mechanism (ESM), the amounts involved around EUR 410 billion would
certainly be significant. However, the support provided by the ECB alone
represents EUR 1,050 billion on the markets and up to EUR 3,000 billion in bank
liquidity. Furthermore, the Monetary Union allows Italy and Spain to borrow at a
far lower interest rate than before the euro. The truth is that questions of
European financial solidarity will mainly come in the post-crisis period, which I
shall now address.
2.2 Initial strategic thinking on the post-crisis environment
Beyond the present emergency and consensus, we must start to consider
"post-
crisis". It
raises some very open questions, some of which are premature. Let
me begin, very simply, with what we know and what we do not know:

We know that growth will be strongly negative in 2020, then positive in
2021. However, we do not know the numbers involved: they depend on the
-
peak lockdown period 1.5% of GDP is lost with every two weeks -, our
ability to bounce back afterwards, and the chain of events with regard to
public health and the economy in the rest of the world.

We now know that despite our initial hopes, we will not suddenly go from the
current phase of general lockdown to a final phase of complete freedom of
movement. Between, there will be a phase 2 of relative lockdown, which
will gradually be wound down, potentially over a long period of time.
However, we do not yet know how: this is where the interaction between the
battle for public health and the battle for the economy will have to be
optimised, and where public debate will have to bring together doctors and
economists. Their opinions may converge more easily than we believe.

Lastly, we know that we will emerge from this crisis with significantly higher
levels of debt. This is clearly the case for government debt, with an increase
of between ten and several dozen percentage points of GDP. But it is also
the case for business debts: the longer the economic hiatus lasts, the more
their problems will evolve from simple cash requirements to lasting balance
sheet challenges and losses to be covered through capital increases. In
financial terms, several businesses will go from facing liquidity constraints to
solvency constraints. And the current cash flow problems will become stock
problems. Relatively speaking, the economic agents generally least affected
are households, which experience high levels of "forced saving"
by this crisis
during the period. Of course, this does not mean that, on a micro-economic
level, some low-income households and financially vulnerable people are not
already feeling the effects of lost income; and these households, which
struggle to make ends meet, have no precautionary savings.
***
This leads us to consider the lessons that history can teach us about recovering
from crises, starting with the post-war years. This has become a particular focus
of economic research today, even though, fortunately, our situation is less
- -
dramatic: the three "classic" themes which give rise to so many questions
are the return to growth, debt treatment, and the proper use of monetary policy.
1/ How to support growth? In Europe, there would be little sense in giving a
cheque to every household, which forms part of the US recovery plan. We do
- -
not have fortunately, to my way of thinking the same social model. Given the
various social protection schemes in place in Europe, to which we can add
forced saving during periods of lockdown, household demand should recover
quite spontaneously. In terms of total demand, greater uncertainty remains
around investment and external demand, particularly with regard to the time
needed for the global economy to overcome the public health crisis. Supply
from businesses could remain stymied in some sectors due to lasting loss of
capacity (bankruptcies) and supply chain difficulties. This is therefore likely to
require investment programmes and climate transition programmes that sustain
demand while improving production capacity; and for that, priority will have to
be given to financing joint initiatives at the European level , particularly given its
higher "debt capacity". In this instance, our remedies for the crisis will be in step
with our long-term priorities. At the national level, any initiatives to further
education, professional training and more skilled employment will continue to be
the best investment for growth: France had fortunately created one million extra
jobs during the four years preceding the coronavirus shock; tomorrow, it will still
be through our wealth-producing work that we will cover the price of this shock.
2/ How to treat the debts inherited from the crisis? Secondly, the question
of public and private debt will arise. A necessary response will involve strict
fiscal management to bring down the deficits: given that an increase in taxes
would not be widely accepted, we will have to fall back on a more selective fiscal
policy and lower public spending. This type of effort will only show results in the
medium term as, in the immediate aftermath, help will be needed to kick start
the economy. Two more specific and more difficult proposals have also been
mooted. Some support a transfer of private debts to public debts, given that the
businesses were not responsible for their loss of activity and only the state has
the capacity to play the role of insurer of last resort. This is a solution envisaged
by the former president of the ECB, Mario Draghi. This can also meet the need
for a movement towards grant or equity investment mechanisms for certain
businesses, rather than simple loans. These transfers would have the
advantage of protecting means of production from the risk of payment default.
They are, however, costly for public finances and complicated to put in place.
The second proposal, which can be cumulative, is to treat the one-off debt
inherited from the crisis separately. The advantage of ring-fencing debt, which
-
Caisse
was notably used in the 19th century it led to the creation of the French
-
des dépôts et consignations after the Napoleonic Wars is that it preserves
"ordinary" fiscal policy. How this
one-off debt should be amortised, however,
remains unclear. A more positive alternative is to mutualise debt with more
robust countries: this is, of course, the post-war Marshall Plan, but it
necessitates a global or European solidarity that is unfortunately uncertain.
However we do it, we will have to bear higher public debts for longer, even
though the burden will be lighter if interest rates remain very low. And this brings
me to monetary policy.
Here again, let's begin with what is most
3/ How to use monetary policy?
certain: inflation should remain weak during the period; it had already fallen to
0.6% in France and 0.7% in the euro area in March. Of course, supply is
restricted; but demand will only recover gradually, and oil prices are expected
to remain low. Therefore, over the long term the Eurosystem will have to contend
with, if not necessarily a risk of deflation, then at least inflation that is too low
for the definition of price stability (close to 2% over the medium term), especially
given that annual inflation has been running at only 1.3% for a decade. This will
thus mean that we not only have the possibility, but also the obligation to
maintain very low interest rates and ample non-conventional instruments,
including public and private sector purchase programmes, long into the future.
- -
This low inflation particularly if it is persistent is fuelling some far more
speculative and complex thinking on post-crisis monetary policy. While
monetary financing is prohibited by the European treaties, it would, for example,
according to these theories, be possible to imagine the central bank creating
money on a lasting basis to directly finance companies. In principle, nothing is
excluded in intellectual debate. However, steps such as these could only be
envisaged if there was a major "downside" risk for price stability.
It would
therefore be imperative to ensure that any such measures guide inflation
towards its target. Indeed, the two pillars that must remain in place come what
central bank's mandate
may during these exceptional circumstances are the
- - -
ensuring price stability and its particularly from fiscal
independence
authorities. Because these two pillars are set down in the Treaty, and, above all,
because they are the foundation of our most precious asset: the confidence of
European citizens in their currency.
**
I would like to conclude by saying a few words about the Banque de France. We
our activities on five key fronts: our network's support for VSEs
have mobilised
and SMEs and households in difficulty; needs with regard to paper money;
economic analysis and monetary policy; close monitoring of the markets; and
the supervision of the financial resilience of banks and insurers. In this period of
extraordinary uncertainty, you can count on the commitment of the women and
men that make up the Banque de France. And I see that as an illustration of a
broader conviction: only through our unity and our solidarity will we overcome
this trying ordeal for our country.