François Villeroy de Galhau: Rising temperatures - inflation, climate
change and digital transformation
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the World
Economic Forum, virtual, 19 January 2022.
* * *
Ladies and Gentlemen,
It is a great pleasure to have the opportunity to deliver a few remarks at this virtual edition of the
World Economic Forum today. As you may have expected from a central bank governor, my
remarks will first be about inflation, with a comparison of the situations in Europe, the United
States and Japan. I will then briefly touch upon the two great transformations underway,
ecological and digital, which will shape our future. By the way, inflation and climate change share
a common feature: rising temperatures... which could be the subtitle of my introductory
statement.
I. Inflation in Europe, the United States and Japan
The strong rebound in 2021 was obviously excellent news for our economies, which have
suffered on a scale never before experienced by current generations. Over the last few months,
inflation has accelerated, primarily because of tensions in energy and shortages in commodities
and intermediate goods. Its magnitude varies across countries: in December, inflation stood at
7.0% in the United States, higher than the 5.0% observed in the euro area, and in sharp contrast
with the 0.6% observed in Japan in November.
This common transatlantic trend calls for a common vigilance from central banks, and a change
from the very accommodative monetary policy rightly - and successfully - pursued in 2020 to
face the Covid crisis. That said, let me stress some intercontinental differences. The US
economy recovered faster and more strongly than that of the euro area, notably due to the very
large fiscal stimulus after the Covid crisis. In December core inflation, excluding food and energy,
was 5.5% in the United States and 2.6% in Europe, showing that the dramatic increase in energy
prices in 2021 does not stand as the sole explanation for this recent surge in overall inflation. The
labour market is also much tighter in the United States: the labour force participation remains
lower than before the crisis, and there is a large decrease in unemployment, to 4.2% in
November 2021 compared with 7.2% in the euro area. These differences explain why monetary
policy accommodation is removed more quickly in the United States with the Fed seemingly
contemplating three significant shifts in a row: tapering of purchases, lift off of interest rates,
downsizing of the balance sheet.
On the other side of the spectrum, Japan is little affected by rising inflation. Indeed, 2021 growth
is lower than in Europe (1.8% vs 5.2%i), inflation returned to positive territory for the first time in a
year in September but remains very low at 0.6% in November; and core inflation remains in
negative territory at -0.6%. These figures are currently distorted by the sharp fall in mobile phone
fees, but the Bank of Japan continues to expect CPI inflation to be only close to 1.1% in 2022 and
2023. Not so long ago, many commentators were worried about a possible "Japanification" of the
euro area. They were wrong, and should be reassured today: the ECB's resolute action has
been successful in preventing this risk and avoided falling into a trap where economic agents'
expectations remain deflationary ("deflationary mind" as the Japanese often say).
These differences between the United States, Japan and the euro area explain the different
paces of their monetary reactions. The ECB remains very vigilant about prices and wages
dynamics, and will gradually adjust its monetary policy to firmly ensure that inflation recedes
soon and then stabilises around its 2% target over the medium term. In our case, we think that
this gradual and sequential approach - first tapering, second lift off, and eventually downsizing -
is appropriate. But we keep our full optionality about the speed of this sequence, and will definitely
be data driven.
II. Two great transformations are underway
The present Covid crisis and inflation hump - serious though they are - should not let us forget
the two "Great transformations" - the ecological and the digital ones - that we will all have to
1
pursue in the long run. I just quoted the seminal opus of Karl Polany in 1944, but I should also
mention another famous economist of the last century, Joseph Schumpeter. They diverged in
their prescriptions, but they were both born in Europe (Austria-Hungary, to be more specific) and
then lived and died in North America. We will need their vision to succeed in the Great
transformations of our demanding 21st century.
1/ Climate change is accelerating. Natural catastrophes such as droughts, heat waves, storms,
etc. cost USD 250 billion in 2021, a steep increase of 24% compared with 2020 - which was
2
already well above the 10-year average . We are hopefully all concerned about the delays in
implementing the Paris agreement. The Banque de France has conducted simulations on the
basis of macro-financial scenarios developed by the NGFS, the Network for Greening the
Financial System: a late and disorderly transition would have far more adverse effects, ranging
between 10% and 20% of world GDP by the end of the century (compared with up to 7% of GDP
for an orderly transition). Beyond COP26, globally coordinated governmental forward-looking
guidance is 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.
Be 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, beyond, financial intermediaries cannot
substitute for adequate - and sometimes difficult - public policies.
The green transition does hold risks - including for inflation -, but it also offers economic and
financial opportunities, as new technologies gradually reach scalability. The sooner we start, the
more positive (or the less negative) the economic balance will be.
2/ Let me now turn to the second major transformation underway: the digital transformation.
Here, Europe is still lagging behind the United States and China. It is of the utmost importance to
remain at the technological frontier in order to reap the benefits of innovation in terms of
productivity and growth, as the winner often takes all. Beyond the economic fallouts, it is also a
matter of strategic autonomy.
These disruptions are also reflected in the monetary, financial and payments spheres - which
we scrutinize as central banks and supervisors -, where digitalisation is bringing about a triple
revolution - and it is far from over:
(i) First, the arrival of new actors born from the tech world - Fintechs and Bigtechs
new players:
- are challenging historical players with radically new approaches to financial services and at
present much less regulation;
(ii) Second, the emergence of new assets: crypto-assets from the blockchain universe in the
form of tokens: they will not be credible as "crypto-currencies", but could be used as settlement
means - think of stablecoins for instance;
(iii) Lastly, the emergence of new technologies tend to
decentralised market infrastructures:
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 associated with the architecture of the monetary and financial edifice that we -
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 development of decentralised finance. For me, the conjunction is "and": the two
pillars clearly work together to create a framework that can foster sustainable innovation; this is
why the EU should adopt the MiCA regulation on crypto assets in the first half of this year. But the
worst conjunction would be "neither, nor": revolutions always happen 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.
In conclusion, we are all trying to deal with high uncertainty. Even more than in "normal" times we
have to keep our eyes wide open to the present realities, but at the same time not lose sight of
the structural priorities beyond the current emergencies. As the French writer Antoine de Saint
Exupéry puts it in The Little Prince: "As for the future, your task is not to foresee it, but to enable
it" ("Pour ce qui est de l'avenir, il ne s'agit pas de le prévoir, mais de le rendre possible"). I thank
you for your attention.
1
OECD forecast, December 2021
2
Estimations by SwissRe, 14 December 2021