Christian Noyer: The euro area perspectives
Keynote speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the
Board of Directors of the Bank for International Settlements, at the Paris Europlace
International Financial Forum, Paris, 10 July 2013.
* * *
Ladies and Gentlemen,
I am very pleased to have this opportunity to speak to such a distinguished audience and I
thank Paris Europlace for the invitation. As Arnaud de Bresson just mentioned it, I take this
opportunity to express, again, my strong support to the ongoing development of financial
activities in off shore RMB out of Paris. In that regard, let me also commend the work
undertaken by Paris Europlace to federate and coordinate the variety of initiatives that we
have seen develop over the recent months.
We are lucky, here in Paris, to benefit from the presence and the dynamism of the major
Chinese banks, which are among the main international banks. This is an asset for Paris.
Similarly, the main French banks are active on the Chinese markets, out of Hong Kong and
out of mainland China. This is another major asset for Paris as a financial center. Both will
benefit Chinese corporates in France, and French corporates in the Chinese markets. Both
these assets will guarantee that liquidity in RMB does and will flow smoothly from China to
Paris. Furthermore, Paris ambitions to serve as a hub for the development of yuan
denominated business throughout the euro area. Paris has the potential, the expertise and
the infrastructures to do so.
To introduce your two-days Forum on "Growth and Investment Opportunities in Europe", I
wish to first give you an overview of the current economic and financial situation in the euro
area and then discuss the major changes currently underway that are considerably
strengthening our monetary union.
1. Overview of the current economic and financial situation in the euro area
Before I start this overview, I would like to quote a famous sentence by Jean Monnet, one of
the founding fathers of Europe: "what matters is neither to be optimistic nor pessimistic, what
matters is to be determined". In other words, what the euro area needs is neither
euro-bashing nor celebration, but awareness and action.
As you all know, overall growth in the euro area has been very weak for a few years. The
most recent figure is a 0.3% contraction in GDP in the first quarter of 2013, following a
decline of 0.6% in the fourth quarter of 2012. Output has thus declined for six consecutive
quarters, with labour market conditions remaining very weak. The euro area economies were
badly affected by the crisis (first financial, then economic, then sovereign debt), and the fiscal
adjustment that became necessary to overcome it has had a negative impact on growth as
well.
ECB projections see a gradual recovery taking shape later this year. A number of elements
support this view:
•
Our accommodative monetary policy stance - which will remain so for as long as
necessary - should contribute to underpinning this recovery;
•
Recent developments in economic sentiment survey data have shown some
improvement from their low levels;
•
Looking ahead to later in the year and to 2014, euro area export growth should
benefit from a recovery in global demand, while domestic demand should be
supported by our accommodative monetary policy stance and by the recent real
income gains due to lower oil prices and lower overall inflation.
• Furthermore, the significant improvements in financial markets seen since last
summer boost confidence and generate wealth effects and should work their way
through to the real economy, as should the progress made in fiscal consolidation.
Nevertheless, the Governing Council continues to see downside risks surrounding the
economic outlook for the euro area. They include the possibility of weaker-than-expected
domestic and global demand and the slow or insufficient implementation of structural reforms
in euro area countries.
Overall, the June 2013 Eurosystem staff macroeconomic projections for the euro area
foresee annual real GDP declining by 0.6% in 2013 and increasing by 1.1% in 2014 thanks
to three main drivers: export growth, accommodative monetary policy and low inflation.
2. How can we boost growth further in the euro area?
A strong fiscal stimulus obviously appears unfeasible, given the necessity to rebalance public
finances. I want to stress two things here:
•
The euro area has very rapidly and efficiently set to work to cure its fiscal
weaknesses and can today boast some of the best results among the major
developed economic regions: its public deficit has been reduced from 6.3% of GDP
in 2009 to approximately 3% today; by the end of 2013, the euro area should show a
positive primary balance;
•
While the commitment to progressively achieve sustainable levels of public debt and
deficit has to be achieved; the measures need to be designed in such a way as to
limit the negative side-effects on growth. For instance, efforts need to be focused on
non-productive spending.
In fact, there is only one way to durably raise the growth potential of our economies, and that
is by structural reforms that enhance competitiveness. It is clear that the euro area is well
equipped to confront the challenges of the 21st century. With 370 million consumers and
high purchasing power, it remains the biggest market in the world. It is also the most
economically integrated area, with highly qualified manpower and very good infrastructures.
Too often, however, euro area countries are prevented from reaping the benefits of their
position by the rigidities that have accumulated over time, during the periods of easy growth.
Now, the international environment is more challenging: new and powerful competitors have
emerged and comparative advantages are shifting. There is no alternative to adjustment.
In this field too, the euro area has made considerable progress over recent years, especially
in the countries that had a particularly large competitiveness gap vis-à-vis the rest of the
zone and which, as a result, fell deeper into the crisis than their neighbours:
•
We have seen a significant improvement in cost competitiveness as measured by
unit labour costs (ULC). Between 2008 and 2012, in the three programme countries
(Greece, Portugal and Ireland) cumulated ULC growth stood about 12 percentage
points below the euro area average.
•
The current account balances clearly show a strong correction. In the three
programme countries, the current account balances as a percentage of GDP
improved by more than 9 percentage points between 2008 and 2012. In Spain, the
current account deficit improved by more than 7 percentage points over the same
period.
Most of the adjustment has been driven by a contraction in domestic demand.
However, in Ireland, Spain and Portugal export performance has been very strong
compared with the pre-crisis period.
In total, the euro area generated a trade surplus of more than 1% of its GDP in 2012
compared with around zero in previous years. We expect this surplus to continue
growing in the coming years.
The speed and depth of the reforms underway in euro area economies is unprecedented.
They have undertaken reforms in the areas most important for competitiveness, growth and
the sustainability of public finances such as labour markets, products markets, social
security, pension systems, etc. These reforms are a prerequisite for dynamic and sustainable
growth in the future and they must be vigorously pursued.
In addition to this very clear determination at the different national levels to reduce deficits
and introduce the necessary reforms, Europe has equipped itself with a new disciplinary
framework. The Heads of State signed a new fiscal compact over a year ago that fixes very
strict rules and gives very extensive powers to the European Commission to assess the
compliance of Member States. This new compact goes hand in hand with the introduction of
rules for monitoring macroeconomic imbalances.
It is important to understand what these institutional advances represent: in effect, they
represent a new Treaty creating very strong commitments for the States via rules that are far
better calibrated and far more binding than those in place when European monetary union
began.
3. Monetary Union is to be enhanced with a banking union
As well as being a year that saw a considerable strengthening of fiscal and macroeconomic
discipline in Europe, 2012 also saw significant progress towards a banking union.
Why has a banking union suddenly become such an indispensable and urgent project?
Simply because we are now certain that many of the problems we have experienced could
have been avoided with a banking union. A banking union is necessary for the smooth
functioning of a monetary union for the following three reasons:
•
It breaks the link between banks and sovereigns by bringing banking supervision
and crisis management to the federal level. With the banking union, banks will be
considered as euro area institutions over and above their nationality; it will ensure
that credit conditions in the euro area will not depend on where you are but on who
you are, which is what should be expected of an efficient financial market.
•
It allows re-integration of the European banking system. A supra-national supervisor
is in fact better placed to assess the risks of cross-border activities and therefore to
protect and encourage such activities; it is not subject to national biases that can
lead to the temptation of economic introversion. It is therefore more credible and
strengthens stability and confidence in the area;
•
Moreover, it restores the full efficacy of monetary policy. If our monetary policy
impulses are not transmitted uniformly to all of the area's countries because of the
bank-sovereign link, it undermines the very foundation of Europe's monetary union;
remember that three quarters of the financing of the euro area's economy consists
of bank loans. By breaking this link, a banking union would restore the federal
dimension of monetary policy.
Today the first pillar of the banking union is being constructed: the Single Supervisory
Mechanism. We are currently working on legal issues, on identifying systemically important
banks within the euro area, on the supervisory model, on the future data reporting and, of
course, on the asset quality review that will be undertaken before we take on the
responsibility of supervision. The governance structure we have adopted will guarantee that,
while the Governing Council will keep the decision power, there will be no conflict of interest
between monetary policy and banking supervision. On the contrary, more consistent
supervision across the euro area should allow for the early detection of potential risks and
imbalances and, ultimately, improve the transmission of monetary policy.
This is a fundamental first step and its rapid implementation will be a major success for the
euro area.
But, alone, it cannot achieve the objectives of a banking union. That is why we must rapidly
construct its two other pillars: a supranational bank resolution authority and a unified deposit
insurance scheme. In this respect, the recent progress made by the Eurogroup both on the
future ESM direct recapitalisation instrument and on a common position on the Bank
recovery and resolution directive is very positive and reaffirms the determination of European
leaders to finalise these decisive steps towards a genuine banking union as soon as
possible.
The banking union will deliver a higher level of structural coherence to the euro area's
financial system, which has already been considerably strengthened since 2008: banks'
capital levels have been substantially consolidated, certain activities have been streamlined
and the most stressed banks have been restructured. Recent numbers show major advances
for European banks in their efforts to strengthen their capital base, in line with Basel III
requirements and, in particular for big international banks, quite comparable to capital
strengthening in US banks (when differences in accounting standards are neutralised). The
banks have reimbursed half of the liquidity injected via the two LTRO programmes.
4. The Eurosystem
From the very first signs of the crisis (remember the Eurosystem injected 90 billion euros in
August 2007 to counter the impact of the first freeze in the financial markets), the
Eurosystem has provided constant support to bank funding (and thereby underpinning credit
to the economy). We have been able to use our collateral framework - with a wide range of
counterparties accepted - to relieve the liquidity constraints faced by banks. The maximum
maturity of our operations has increased from three months before the crisis to three years.
Through these measures, we have addressed the liquidity pressures on banks and avoided a
genuine credit crunch.
At last week's meeting, we decided to take a further step towards forward guidance on our
rate policy by saying that we expect the key ECB interest rates to remain at present or lower
levels for an extended period of time. All in all, both our standard and non-standard monetary
policies have prevented the materialisation of deflation risk. The programme we launched a
year ago - Outright Monetary Transactions - succeeded in countering speculation about a
euro area break-up. Its basic functioning is as follows: if a given State suffers unwarranted
tensions on its debt, we could decide to intervene as far as is necessary, provided that State
commits to an agreed recovery programme.
Undoubtedly, the announcement of the creation of the OMTs had a very strong impact:
banks and firms regained access to capital markets; the spreads between the yields on
Spanish and German 10-year bonds fell from more than 6pp in July 2012 to just under 3pp in
May 2013, while the premium on Italian 10-year bond halved. This new monetary policy
instrument has therefore fostered a considerable improvement in financial conditions in the
euro area and represents a solid shield against further speculative attacks. The ECB's
Governing Council has stressed that monetary policy will remain accommodative for as long
as necessary. In the period ahead, we will monitor very closely all incoming information on
economic and monetary developments and assess any impact on the outlook for price
stability.
*********
The euro area is getting stronger: it is undergoing major reforms, building new institutions
and setting up powerful crisis management instruments. These major and in many respects
historical advances will lay the foundations for the future of our monetary union.
The effects on financial markets are already very visible: tensions have abated and signs of
defragmentation are starting to appear (TARGET balances for instance have declined by
almost 300 billion€ or 25% from their peak). We must now pursue the efforts already initiated
and do our utmost to ensure that these improvements feed through to the real economy so
that economic growth can return and unemployment can reverse its rising trend.
Thank you.