francois villeroy de galhau : twenty years after the introduction of the euro, what are the economic prospects for europe? speech by mr francois villeroy de galhau, governor of the bank of france, at the bridge forum dialogue conference, luxembourg, 10 january 2019. * * * accompanying slides of the speech. i would particularly like to thank olivier de bandt, chahinez benmissi, laurent ferrara, remy lecat, berengere rudelle, giulia sestieri and edouard vidon for their help in preparing this speech. ladies and gentlemen, i am delighted to speak before you this evening here in luxembourg, one of the founding capitals of europe and a bridge between france and germany for 180 years. i would like to extend my warmest thanks to my friend and colleague gaston reinesch for his invitation to the bridge forum dialogue. i stand before you as a committed european : this month – january 2019 – we celebrate 20 years of the euro, the common currency of 340 million europeans. the three principles on which we have built this success ( i ) must guide us in addressing europe ’ s challenges in the face of 2019 ’ s uncertainties and in working towards the progress that we still need to make ( ii ). * * i. the euro ’ s success was built on three principles that are now more vital than ever as to whether the euro has been a success ; there are few among us this evening who would have any doubts. it is more interesting to look back on the reasons for this success, which, to my mind, was built on three founding principles : the eurosystem ’ s mandate of maintaining price stability ; the means employed to carry out this mandate, i. e. independence ; and the spirit that drives its action – general european interest. a - the mandate : price stability the eurosystem has been entrusted with a very clear mandate by the european treaties : 1 its primary objective is to “ maintain price stability ”, in other words to avoid prolonged periods of excessive inflation – as seen in germany after world wars i and ii – or deflation – seen following the crisis of 1929 –, which have consistently negative effects on the economy. price stability preserves household purchasing power ; and more than that, it builds confidence in the value of the currency and consequently reinforces the confidence of economic players in all their decisions for the future, from investment to contract conclusion. some observers would have preferred a “ dual mandate ” to target both

importantly, stricter oversight procedures, in line with the rationale at the heart of basel ii approach. french banks are currently in the final straight as regards the implementation of the new regulation basel ii is playing a key role in moves to buttress risk management at credit institutions. the european council and the parliament adopted the capital requirements directive on 14 june 2006, a crucial milestone in implementing the basel ii mechanism, established by the basel committee for banking supervision, within the european union. the mechanism's three pillars – minimum capital requirements, supervisory review, and market discipline – form a prudential framework that is both more extensive and more sensitive to the risks actually incurred by credit institutions. above all, basel ii should encourage institutions to improve their internal management and carefully calibrate their capital requirements. at present, we are concentrating on assessing the implementation of internal ratings - based approaches for credit risk and advanced measurement approaches for operational risk. the commission bancaire therefore undertook a series of on - site inspection missions in 2006 and 2007 to evaluate the systems and models developed by french institutions. the missions were initiated after the commission's general secretariat had received the findings of the institutions'" internal validations ". the purpose was to make sure that institutions were in compliance with the minimum regulatory requirements and, more generally, to check the quality of their information systems and the conditions in which these mechanisms are used and controlled. these inspections revealed that institutions had indeed already made extensive achievements, but also showed that some of them needed to make further progress on pillar 1 of basel ii, especially with regard to : - the collection and estimation of the basel parameters, particularly probabilities of default ( pd ) and loss given default ( lgd ) : on this point, it is important that banks should steadily upgrade again their historical data so as to cover full business cycles ; - permanent control and validation of information systems and / or models : implementing thorough benchmarking and back - testing processes is crucial in this context. with regard to pillar 2, the commission bancaire urges banks to make certain that their internal capital adequacy assessment processes capture risks which are covered incompletely or not at all by pillar 1, especially concentration risk, liquidity risk and overall interest rate risk. in the months ahead, priority must be given to developing stress tests that are more comprehensive, i. e. that encompass the various risks ( credit, market, etc. ) and that aim for exhaustive coverage of risk exposure. banks