François Villeroy de Galhau: Developments in Europe against the
background of global uncertainties
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Paris
Europlace International Financial Forum, New York City, 18 April 2016.
* * *
In 2016, the world in general, and Europe in particular, is experiencing a period of uncertainty:
uncertainties relating to our security, with the threat of terrorist attacks; political uncertainties,
with the risk of a "Brexit" and the refugee crisis; as well as economic uncertainties, with lower
economic growth in emerging economies, including China, and high market volatility at the
beginning of the year. Nevertheless, recovery is underway in Europe.
As you may know, a meeting of the ECB Governing Council will be held in two days, so I have
to respect a silent period on monetary policy matters. But I can emphasize that, in response to
weak inflation and heightened uncertainties, the Eurosystem, of which the Banque de France
is a member, has been acting decisively. And European countries have been implementing
structural reforms since the onset of the crisis.
Those national efforts are crucial, but we need to go further with more coordination:
coordination to direct savings towards projects and countries that need them; coordination of
the reforms themselves at the European level.
1/ Changes in economic conditions
[Slide 2] Economic growth in Europe recovered markedly in 2015 and is expected to get firmer
in 2016 and 2017, notably thanks to the dynamism of the German and Spanish economies
and, to a lesser extent, to France and Italy.
Labour market conditions are improving and unemployment is receding. In the euro area, the
unemployment rate is at its lowest level for four years. However, it is still too high.
In France, growth remains moderate. It reached 1.2% in 2015, up from 0.2% in 2014, and
should stay at least at this level in 2016 and 2017. Nonetheless, the business climate indicator1
improved throughout the year, and in January 2016 reached its highest level for four years.
2/ Inflation developments
[Slide 3] In 2015, inflation was nil in the euro area, well below the Eurosystem objective of an
inflation rate below, but close to, 2% over the medium term. Inflation has even dipped
temporarily into negative territory, with prices falling 0.1% year-on-year in March. However,
this decline is mostly related to energy prices: core inflation was 1% in the same month. Oil
prices seem to have bottomed out and this should help inflation return to positive territory over
the course of 2016, thereby lowering real interest rates and making monetary policy more
effective.
[Slide 4] The new comprehensive package of measures adopted on 10 March 2016 made euro
area monetary policy more accommodative. One of its distinctive features is that it targets the
financing of the real economy. The new series of targeted refinancing operations (dubbed
"TLTRO 2") should improve medium-term funding conditions for banks and foster bank lending
to companies and households.
3/ Structural policies
Moreover, monetary policy is not the only game in town. It is supported by structural reforms
that increase potential growth, particularly in countries with a high unemployment rate.
History has shown that ambitious reforms can contribute durably to growth. Sweden in the
1990s and Germany a decade later have demonstrated that structural reforms enhance
employment rates, potential growth and resilience. They also reduce labour market duality,
and provide more opportunities to new entrants in the labour market, particularly young people.
In the wake of a severe crisis, Sweden and Germany rebuilt their economic models and, as a
result, have been better able to weather the latest downturn.
Indeed, a number of European countries are conducting major reforms to bring high and
sustainable growth back. Those reforms are particularly challenging when it comes to the
labour market, but they are needed. We need to improve labour flexibility and reduce the
duality in the labour market between permanent and temporary contracts, which generates
both high structural unemployment and inequality.
The most emblematic example is Spanish reforms. Their results are impressive, especially
when we consider the very difficult economic situation in the country during their
implementation. Since the beginning of 2013, Spain has experienced a decrease in its
unemployment rate of some 6 percentage points and Spanish growth is nowadays one of the
main drivers of the European recovery.
Contrary to preconceptions, France has also demonstrated in the past its capacity to meet the
challenge of economic and social reform. In the 1990s, to prepare for the introduction of the
euro, France pursued a competitive disinflation policy that proved highly effective. Remember
that in the late 1990s, France experienced the highest GDP growth and the weakest inflation
rate among European countries, along with a significant fall in its unemployment rate.
Today, French reforms are heading in the right direction, [Slide 5] in particular the tax credit
for competitiveness and investment (CICE) and the Responsibility and Solidarity Pact (RSP)
that enhance the competitive strength of the French economy. A policy of administrative
simplification, the so-called 'simplification shock', and a new law to sustain economic growth
and entrepreneurship ('loi Macron'), are also being conducted in order to rebuild business
confidence. However, we are not there yet and a number of reforms need to be complemented.
In particular, in the labour market: hopefully renewed progress will be made with the draft law
under discussion in Parliament.
Finally, in the euro area, fiscal policy is now more balanced since significant adjustment has
already been achieved. Structural efforts and a growth recovery have led to a reduction in
deficits and to a stabilisation in the ratio of debt to GDP.
This more balanced policy mix is an opportunity to engage in new ways of thinking and to
strengthen the recovery via stronger economic coordination in Europe. The room for
manoeuvre in economic policy is highly heterogeneous across European countries, and each
country should use its capacity to improve the overall situation [Slide 6]. European countries
have done quite a lot on their own, but now we can and must do more to coordinate
demandside policies and structural reforms at the European level. To do so, I would like to make two
proposals.
4/ Strengthen Investment
First, we need to improve investment financing [Slide 7]. Our efforts should be put towards
financing growth and innovation and towards finding the right mix between debt and equity
financing solutions, while still preserving financial stability and consumer protection. In the EU,
the European Commission has launched several initiatives to serve these objectives,
particularly the Investment Plan and the Capital Markets Union.
Second, we need to focus on removing obstacles to investment, providing visibility and
technical assistance to investment projects and making smarter use of new and existing
financial resources. The European Fund for Strategic Investments (EFSI) drives the
Investment Plan for Europe. It supports strategic investments in key areas such as
infrastructure, education, research, innovation, as well as risk finance for small businesses.
Through the use of limited public guarantees, it aims to foster private investments totalling
EUR 315 billion in three years. For the first year, the Plan managed to trigger around
EUR 76 billion of investment in Europe.
The action plan on the "Capital Markets Union project", launched in September 2015, aims at
diversifying the way the European Union economy is financed. The objective is to achieve a
better balance between bank credit and market-based financing. France is a euro area
frontrunner in this field, with markets providing 40% of the financing for its economy. Various
initiatives are already well underway, like the framework for simple, transparent and
comparable securitisation instruments, or the revision of capital requirements for investment
in infrastructure by insurance companies.
The Juncker Plan and the Capital Markets Union should complement each other and the
Banking Union, which is already in place, to fully deliver their results in terms of growth and
investment. Therefore, I prefer the concept of a "Financing and Investment Union" rather than
a "Capital Markets Union", as it better reflects the ultimate objective which is growth, thanks to
a better mix of financing instruments including, but not limited to, capital markets [Slide 8].
Significant amounts of savings are available in the euro area and these should be directed
towards long-term assets, as well as to those projects and countries that need them. Innovative
schemes need to be developed at European level, such as European venture capital funds, in
order to support the creation and growth of new businesses. The composition of investments
is equally important, as too little money is devoted to R&D and long-term investments. We also
need to encourage equity financing rather than debt funding.
5/ Improve European economic governance
The second idea I would like to share with you relates to economic governance in Europe. I
believe we need to make progress towards a more economically integrated euro area. This is
essential, regardless of whether or not the United Kingdom remains in the European Union.
Naturally, I would like it to stay in. My point is not purely institutional. It is not about "more
Brussels", it is about more growth and employment. Indeed, economists estimate that the
current lack of coordination between national economic policies has cost Europeans between
two and five percentage points of GDP growth since 2011. Contrary to the case of monetary
policy, the aim is not to fully integrate all of our economic policies at the European level, but to
achieve a "full coordination" of fiscal and structural policies. For this, we need to have shared
economic goals, and a true "collective strategy" for the euro area, in which each country has a
role to play to improve everyone's situation.
This requires trust based on a clear pact: national reforms and, not or, European coordination.
This full coordination also rests on the setting up of a strong and legitimate European
institution: a euro area Finance Minister backed by a European Treasury system and subject
to greater democratic accountability. This Finance Minister would be in charge of defining the
collective strategy, supervising its decentralised implementation by Member States and
handling crisis management tools. Going forward, he/she could also be in charge of a common
budget.