François Villeroy de Galhau: France - economic developments and
reforms, where are we heading?
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at The Economic
Club of New York, New York City, 18 April 2018.
* * *
Accompanying slides of this speech.
Ladies and Gentlemen,
I am very pleased and honoured to give this speech to the Economic Club of New York.
The theme of my speech is "economic developments and reforms in France". One year ago, you
would probably not have suggested it. This shift tells something: France is currently going
through exciting times and deserves a close scrutiny. [slide 1].
Before addressing the subtitle of my speech "where are we heading?" I would like to ask "Where
are we starting from?" As about everywhere among the advanced economies, France
experienced a decline in its potential growth from 2% in the 1990s to about 1.3% currently.
Potential growth could be higher, as in several other advanced countries.
An increase would indeed be necessary to face the headwinds of high public debt, ageing and
environmental transition, while safeguarding the European social model. If funded, this European
social model is a long term economic asset, while bringing more education and more cohesion
[slide 2].
There are two other more specific challenges for France. The first one is a persistently high
unemployment, which never fell below 7% since 1983. The second one is high public
expenditures, the highest among EU countries in 2016 (as a share of GDP).
Yet, France also enjoys major assets. First, a high investment rate, which has returned to its
2008 peak for private non-residential investment - close to the US level, indeed - and remains
above the euro area average for public investment. It also has a wealth of fast-growing innovative
firms according to Deloitte. [slide 3]
Second, a high level of hourly productivity, on a par with Germany and the United States, but with
a more dynamic working-age population than in the rest of Europe, which will support potential
growth in the medium term. [slide 4]
That's where we are starting from. I would like to underline that we are enjoying a favourable
momentum, which offers a window of opportunity for reform. This opportunity is indeed being
seized to implement ambitious and consistent reforms, so yes, France is heading in the right
direction and at a fast pace. [slide 5]
1. A favourable momentum: a robust upturn creates an appropriate timing for reforms
Business climate and consumer confidence increased sharply in 2017. Surveys in all sectors
reached levels that had not been observed for several years. After the uncertainties surrounding
the presidential campaign, the French institutional framework now seems solid to international
observers. Allow me a one-second excursion from economic to political science. In the troubled
democratic times we live through, France has the strong advantage of a clear two-round majority
voting system, and 5-year terms for the President as well as for Parliament.
The latest business surveys and economic data point towards some moderation of late, which is
not specific to France but also seen in other euro area economies. GDP growth in the first
quarter could thus prove somewhat softer than previously anticipated. However, the underlying
momentum remains solid and broad-based, and we interpret recent data as reflecting a
temporary pull-back from the very strong and above-trend pace recorded in the second half of
last year. It does not alter the inflation outlook over the medium term horizon that is relevant for
our monetary policy. [slide 6]
Against this backdrop, we forecast GDP growth in France to remain robust in 2018, at 1.9%,
after 2.0% in 2017, and to stabilize at around 1.6%-1.7% per year in 2019-20, which would
remain above potential. Thanks to this performance, the output gap is expected to close in 2019.
The engines of growth should be more balanced. Household consumption is expected to
accelerate somewhat, with significant gains in the purchasing power of households of + 1.5% to
2% per annum. In particular, the tax measures set out in the budget laws should help to boost
household income from the end of 2018. Total investment should lose some momentum but
remain a significant contributor to output growth. And as exports pick up, the contribution of
external trade should turn neutral. [slide 7]
The performance on the labour market has been very encouraging as well.
The unemployment rate decreased from 10.0% at end 2016 to 8.9% at end 2017 on the back of
job creations of around 250K in the private sector, which exceeded expectations. In this context,
the unemployment rate is expected to further decline and hit at end-2020 (7.9% in 2020 Q4) its
lowest level since end-2008. [slide 8]
This economic recovery and higher inflation in France as well as in the euro area as a whole
(1.7% and 1.3% respectively for year-on-year harmonised inflation rates in March) have been
decisively supported by our non-standard monetary policy measures. We are now following our
central course of gradual normalization. And there is at present a high convergence in our views
within the Governing council: whether our net asset purchases stop in September or December
is not a deep existential question. Along with this clear sequencing of gradual normalisation, we
also agree that our monetary policy will remain accommodative for an extended period of time. In
particular, keeping a sizeable stock of assets is key for easing financial conditions over a long
horizon by compressing term premia.
So we are predictable, but we are not precommited. What could slow down this course of
gradual normalisation? Certainly not fiscal dominance: let me be crystal clear, nobody should
expect us to delay a warranted monetary normalisation in order to accommodate the debt
problems of any Member state. Instead, we should pay close attention to a possible cumulative
risks scenario, the likelihood of which has increased recently: an adverse loop of protectionist
threats, unfavourable exchange rate movements, and abrupt financial markets corrections. Such
a negative loop would tighten financial conditions, and deteriorate the growth outlook in the
Eurozone. Our monetary policy stance would then have to be adapted, depending on the ultimate
impact on inflation prospects.
In any case, this cyclical expansion provides an appropriate timing for reforms, especially for
those that may be costly in a downturn, such as reduction in public expenditures and labour
market reforms. The growth and employment performances of other European countries [slide 9]
in recent years show that implementing deep reforms can have large payoffs. In Spain, for
instance, significant reforms were implemented between 2010 and 2012 to reduce the duality of
the labour market, to increase labour flexibility for firms and to strengthen active labour market
policies. There have been some short-term employment costs, but France would not have to
face these costs in the current upturn thanks to the supportive medium prospects, and could
enjoy major benefits from structural reforms.
2. This momentum is being harnessed to implement ambitious and consistent reforms.
[slide 10]
However, to take advantage from these benefits, there is a need for consistent structural
reforms. The success of the reforms will indeed hinge on perseverance - as no reform has a
one-year pay-back - and on their overall consistency, as all reforms are in a close interaction.
Let me start first with the interaction between the public debt, efficient public spending and the tax
system.
Although some progress has already been achieved, structural public finance reforms are still
needed. Thanks to the strong economic growth in 2017, the headline deficit fell below the 3%
threshold, reaching 2.6% of GDP, and finally complies with the Stability and Growth Pact deficit
rule. A tax reform was voted last Fall, lowering the tax burden on companies and on capital: the
corporate tax rate will gradually fall from 33% to 25% in 2022 and personal capital income will be
taxed by a flat rate from 2018. And last week, the French government published its revised
medium-term targets: the public deficit is projected to turn into a slight surplus by 2022, while the
public debt-to-GDP ratio - which reached 97.0% of GDP in 2017 - would decline by almost 8
percentage points at the same 5-year horizon. This ambition is very welcome but the
better-thanexpected results of 2017 should not make us complacent about the remaining challenges. Even
with favourable cyclical conditions and persistently above-trend GDP growth forecasts, the
success of the consolidation strategy will depend on capping public spending growth. The
government projects public spending to increase in real terms by around 0.25% per annum (on
average) between 2019 and 2022, compared to +1.1% in 2017-2018. Achieving this significant
change is necessary and will require additional efforts, which are not yet specified. Public
expenditure needs to be made more efficient, in particular on social protection spending, which
include pensions and unemployment benefits and which constitute the bulk of the difference
between French and German public spending ratio, as can be seen on the graph. [slide 11]
Second, I would like to emphasise the interaction between labour market and education reforms.
Ambitious labour market reforms have been implemented, aiming at increasing employment
flexibility. The negotiation space given to social partners for decision-making, especially at firm
level, has been widened. This could reconcile efficiency and worker protection, as we see it in
Northern Europe. Staff-representation obligations have been simplified by the creation of a single
representative body instead of three, which enlarges the negotiation field and hence eases
compromise. Finally, the uncertainties of labour disputes have been eased with a cap on
severance pay in case of abusive lay-off and a new type of collective layoff by mutual consent.
[slide 12]
To yield its benefits, increased flexibility on the labour market requires greater adaptability of skills
through a better-functioning lifelong training and apprenticeship system. Without adaptability of
skills, the higher layoff rate due to increased flexibility could push up structural unemployment, as
unemployed workers deprived from appropriate skills may not find a new job. On the contrary,
combining flexibility and skill adaptability will lead to a higher job turnover, but also to a better
allocation of labour and a lower structural unemployment. Currently, the French lifelong training
system is unable to provide the appropriate skills, as shown by the disconnection between job
vacancies and the unemployment rate, here on an inverted scale. Unfilled vacancies represented
more than 200 000 lost jobs in 2017. Apprenticeship is insufficiently developed, resulting in a high
youth unemployment rate. Lifelong training and the apprenticeship system are currently being
reformed, with ambitious and accurate proposals by the government. The lifelong training reform
will strengthen training rights, especially for the least qualified and the unemployed. It will simplify
arrangements for businesses and streamline the governance and financing of the system, while
14bn € will be dedicated to it in the 5-year investment plan. Add the announced bold plan for
primary and secondary education, as well as for the access to University, and you can really
expect that the French labour market and skills will dramatically improve. [slide 13]
My final illustration is the interaction between labour and product market reforms. Labour and
product market reform both imply an alleviation of red tape and ease business activity.
There has been significant progress in the past, as reflected by the decrease in OECD's Product
Market Regulation or network industries regulations indicators. The impetus for these reforms
was either European, for example in network industries, or national, for example in retail trade or
in regulated professions with the 2015 Macron law. It led in both cases to a significant decrease
in prices, purchasing power gains for households and a cut in intermediate consumption costs
for firms. One spectacular example is the arrival of a new competitor in the mobile services
market, leading to an 11.4% telecommunication price reduction in 2012. A significant reform is
underway with the ongoing railway reform preparing for increased opening to competition. [slide
14]. This is not yet done and you see again images of French strikes. But they shouldn't have
significant economic effects, and strikes are sometimes, at least in France, the road to reform.
Finally, the European environment can support the French momentum. A strengthened
Economic Union in the Eurozone can indeed be an accelerator for national reforms. There
should be, according to me, four dimensions to this accelerator role: macroeconomic,
microeconomic, fiscal and institutional. The macro accelerator is a collective economic strategy
in the euro area. It is premised on one simple fact: economic growth and employment will be
stronger in the euro area as we will combine more reforms in countries where they are needed,
like France, with more stimulus in countries with leeway for it, like Germany or the Netherlands.
The micro accelerator would rely on a Financing Union for Investment and Innovation. The aim is
to mobilise the EUR 390 billion savings surplus of the euro area last year, notably to shore up
equity which is the key to an innovation economy, and also to foster synergies, thanks to an
integrated steering mechanism, between the Juncker investment Plan, the Capital Markets Union
and Banking Union. The fiscal accelerator could be a euro area investment budget used to
finance, for the benefit of all countries, certain "European common goods" such as digital
technology, energy transition, security, and migration controls. If there is such progress on
substance, in terms of institutions, we would need a euro area Finance Minister, President of the
Eurogroup and member of the Commission, backed by a European Treasury; but also a euro
area Parliament group, in order to ensure the democratic legitimacy of the institutions and
decisions. [slide 15]
***
France is heading in the right direction and at a fast pace, with a strong government commitment
to reforms. I stress it as fully independent Central Banker. France is changing for the best.
But France is not alone obviously. The European and international environments need to remain
supportive. In terms of economic upturn first, but also in institutional terms. A country cannot
implement the appropriate structural reforms, improve its flexibility and attractiveness and then
face a major disruption in international trade, reducing the pay-offs of such a political effort. If we
want to preserve the present global expansion, if we want to encourage reforms and hence
increase potential growth, we need to maintain an open international environment, a rule-based
multilateral order. [slide 16]
I stress it here in the United States, as a dedicated European speaking to close historical allies:
we have many common challenges, politically and economically.
To avoid disaster, we should resolutely build common solutions. Believe me: France is taking its
part of the task, today more than ever.