EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 3 June 2004 
at the request of the French Ministry of Economic Affairs, Finance and Industry 
on a draft legislative provision authorising infl ation-indexed loans from credit institutions  
(CON/2004/20) 
 
1. On 1 April 2004 the European Central Bank (ECB) r eceived a request from the French Ministry of 
Economic Affairs, Finance and Industry for an opi nion on a draft legislative provision authorising 
inflation-indexed loans from credit institutions  (hereinafter the ‘draft provision’).  
2. The ECB’s competence to deliver an  opinion is based on the first and sixth indents of Article 2(1) 
of Council Decision 98/415/EC of 29 June 1998 on th e consultation of the European Central Bank 
by national authorities regarding draft legislative provisions1, as the draft provision relates to 
currency matters and rules applicable to financial institutions insofar as they materially influence 
the stability of financial institutions and mark ets. In accordance with the first sentence of 
Article 17.5 of the Rules of Procedure of the Eu ropean Central Bank, the Governing Council has 
adopted this opinion. 
3. Under current French law, statutory or contr actual provisions are prohibited from containing 
clauses providing for indexations based, inter alia,  on the general level of prices or of salaries2. 
However, by way of exception from this general pr ovision, debt instruments and financial futures 
may be indexed to the general level of prices3. The ECB notes that the French authorities wish to 
extend this exception to loans granted by credit institutions or by the Caisse des dépôts et 
consignations  (CDC) by amending Article L. 112-3 of the Code. The ECB understands that the 
draft provision affects consumer loans (includi ng home loans), corporate loans and inter-bank 
loans. 
4. The European Monetary Institute (EMI) has previo usly examined the issue of indexation clauses in 
its Opinion CON/97/244. The EMI noted that ‘according to Article 9, §1, a provision of the 
[German] Currency Act shall be deleted which lays  down a requirement for the prior authorisation 
of index clauses by the competent authority. (… ) The monetary law of the Community currently 
                                                      
1  OJ L 189, 3.7.1998, p. 42. 
2  Article L. 112-2 of the Monetary and Financial Code (hereinafter the ‘Code’). 
3  Article L. 112-3 of the Code. 
4  EMI Opinion CON/97/24 of 16 December 1997 at the request of the German Ministry of Justice, under Article 109f(6) of 
the Treaty establishing the European Community (The ‘Treaty ’) and Article 5.3 of the Statute of the European Monetary 
Institute (EMI), on a draft act (the ‘draft law’) for the introduction of the euro. 
2 under consideration does not contemplate any proh ibition or Community control of index clauses. 
Therefore, the EMI agrees with the conclusion of  the Explanatory Memorandum that, with regard 
to the monetary policy function, national provisions on index  clauses are no longer necessary. 
However, Member States may, for other policy requirements, establish or maintain indexation 
provisions relating to the competence of the national le gislator, e.g. in the field of contractual law, 
such as the provision (…) for residential rent contracts’ . The EMI’s statement is still valid today 
and the ECB therefore considers that Member States may, in principle, authorise indexation clauses, as long as they comply with Community law.  
5. According to the French authorities, the draft provi sion is necessary to ensure coherence with the 
regime for inflation-indexed securities. The ECB ta kes note of the objective pursued by the French 
Government of extending the freedom of contract , in order to allow economic agents to hedge 
against the inflation risk, and to  enlarge the range of available financial products. However, the 
ECB would stress that a widespread use of inde xation clauses would give rise to considerable 
concern. In particular, widespread indexation in wage and price setting may generate excessive 
rigidity in the relative price system and would risk fuelling inflation spirals. Although the demand for indexation clauses, in the current environment of low inflation, appears relatively limited, it 
cannot be fully excluded that households when fa ced with an increased debt-service burden, as a 
result of inflation rising faster than wages, would request that their wages be more closely indexed 
to prices. Similarly, certain firms might be tempted to pass any nominal increase in their debt-burden on to the prices they charge to consum ers. If the economy were hit by a persistent 
inflationary shock, in case of widespread indexatio n, it would be very difficult to reduce the use of 
indexation clauses once inflation rates have passed a certain threshold.  
6. The implementation in France of the 2003 reform introducing the automatic indexing of regulated 
savings rates to inflation will require banks to ma rginally adjust the management of their assets and 
liabilities in order to minimise inflation risk. The ECB understands that the proposed change would 
be particularly important for the CDC which ch annels deposits on regulated savings accounts and 
uses these funds, inter alia , to finance public housing and to grant loans to public housing bodies. 
However, since these specific loans are themselves indexed to regulated savings rates, the option of 
directly indexing them to inflation is likely to be of limited use. The French authorities consider that authorising the indexation of bank loans to in flation poses no specific risks to the stability of 
the financial system, in particular because its impact would remain limited. The ECB has no comments on this aspect. 
7. A decree of 24 October 2001
5, which will also apply to the draft provision, further specifies the 
terms and conditions for the indexa tion of certain financial instru ments to the general level of 
prices. The Decree provides that the harmonised index of consumer prices (HICP), excluding 
                                                      
5  Décret no 2001-966 du 24 octobre 2001 portant modalités d’indexati on de certains instruments financiers sur le niveau 
général des prix, Journal Officiel de la République Française , no 248, 25 octobre 2001 (Decree No 2001-966 of 
24 October 2001 setting out the terms and conditions for the in dexation of certain financial instruments to the general 
level of prices, Official Journal of the French Republic , No 248, 25 October 2001). 
3 tobacco, for the euro area as published monthly by  Eurostat may be used to implement the 
indexation. However, as is the case for French in flation-indexed Governme nt bonds, other general 
price indices, such as the French consumer price index, may in principle also be used. The ECB 
considers that indexation to a national price level or  rate of inflation, rather than to a euro area 
index, may risk increasing the heterogeneity of financial systems across the euro area and in 
general of the different euro area economies. Inde xation to a euro area index would therefore be 
clearly preferable from a monetary policy viewpoint. The ECB also supports, for reasons of transparency and comparability, the use of the HICP for the euro area.   
8. The ECB confirms that it has no objection to the competent national authorities making this 
opinion publicly available at their discretion. This opinion will be published on the ECB’s website 
six months after the date of its adoption. 
  Done at Frankfurt am Main, 3 June 2004. 
 
[ signed ] 
 
The President of the ECB 
Jean-Claude TRICHET