Keynote address by François Villeroy de Galhau, Gouverneur de la Banque de France, Official Monetary and Financial Institutions Forum webinar, 25 September 2020 « ROLE OF CENTRAL BANKS IN THE HEART OF THE ECOSYSTEM i »  Contact presse : Mark Deen (mark.deen@banque-france.fr), Déborah Guedj (deborah.guedj@banque-france.fr)  Page 2 sur 10  Good morning and welcome to this webinar, jointly organized by the Official Monetary and Financial Institutions Forum and the Banque de France. What better way to demonstrate the digital transformation than holding an event in cyberspace. It has been common in recent years to hear about disruptive technologies but over the past 6 months, information technology has instead been a crucial source of continuity in a highly disrupted world. Digitalization is one among many factors transforming central banking and this will be my broader theme this morning. The ECB Strategic Review rightly launched by Christine Lagarde, with an explicit list of challengesii, is the opportunity to reflect on how the Eurosystem should respond to them. The shocks that have hit the economy in the past decade have been unprecedented, but in hindsight, many long-term structural shifts were occurring that have caused the unstable and complex situation we face today. Global natural interest rates had already been falling since the early 1980s driven by the demographic transition and risk-aversion in key emerging markets. Digitalisation and globalisation, combined, have been pressing for “lowflation”. Financial vulnerabilities were also steadily, but invisibly, rising since the socalled Great Moderation.

BIS central bankers’ speeches  1  Most of the aforementioned features were shared with other economies, such as US and Japan. The balance sheet recession they describe remains tractable, at least in theory, with a combination of short term economic stimulus, long term commitment to macroeconomic stability, structural reforms, and patience. However, there have been several idiosyncratic issues which set the European experience apart from the other economies. They were manifested into severe public sector problems in several Eurozone countries, widespread lack of trust in institutions and authorities, and the strengthening of centrifugal forces which risked breaking the euro apart. What were the factors that exacerbated the crisis in the Eurozone? While an exhaustive list would be long, I would like to highlight three of them. -  First, the inter-dependence between sovereign credit rating, financial sector risk premia and the real economy was exacerbated by incomplete financial market integration. While the region as a whole suffered from capital outflows, financial integration within EU went in reverse during the past four years. The repatriation of cross-border financial flows created further problems in the Eurozone economies and neighboring region. In fact, the subsequent cross-border deleveraging and derisking has been one of the main crisis propagation channels that has affected eastern European countries, Albania included. -  Second, the divergence in intra-regional economic policies resulted in a divergence of competitiveness within the EU and Eurozone. This accentuated existing intraregional balance of payments issues during the crisis, highlighting the need for long overdue economic and fiscal reforms.