francois villeroy de galhau : from a couple under pressure to a europe in transition speech by mr francois villeroy de galhau, governor of the bank of france, at the french german business forum, paris, 16 november 2022. * * * i am delighted to be with you today, to bring to a close this forum on " europe in transition ". while this transition had already got underway, it is now being dramatically accelerated by an unprecedented succession of shocks. these shocks are identical for both germany and france, but they put our franco - german unity, and more broadly european unity, to the test. it is not that surprising : our energy policies are separate, and our democratic lives are primarily domestic, and they are under pressure in both our countries. however, today i would like to express a conviction shared with my friend and colleague joachim nagel, president of the bundesbank : to divide us would be to condemn us. allow me to give you my personal view : i believe that i am one of the french officials who knows germany best ; because of my family roots in lorraine and saarland, i am a " frontier man ". but it is also my professional conviction. in washington last month, we have heard too many doubts voiced by international investors about europe and its reaction to the russian invasion of ukraine. and yet, we have just emerged from a successful experience : let us recall that it was collectively considered that we europeans were in a very bad position in march 2020 at the onset of the covid crisis. but together we have managed to weather this crisis very well, thanks for instance to the joint purchase of vaccines and the sure1 and next generation eu programmes, backed primarily by germany and france. i will therefore venture to outline here, in the field of economics, where we will succeed together, what we differ on today, and - lastly and perhaps most importantly, what both our countries are in danger of forgetting. i. where we will succeed together : monetary policy this shock further increased inflation, which had already reappeared during the strong post - covid recovery. thus, after a decade of too low inflation, and even a risk of deflation during the covid crisis, inflation now stands at 10. 7 % in the euro area as a whole ( 7. 1 % in france, and 11. 6 % in germany ). exogenous factors, especially energy prices ( up 42 % ) and certain food prices, still account for half

of total european inflation. nevertheless, inflation has become more " domestic " and broad - based : core inflation excluding energy and food - has gradually increased and reached 5. 0 % in october, and this is precisely where monetary policy has a more direct impact. the ecb governing council therefore decided at the end of october to raise its key rates by a further 75 basis points, bringing the deposit facility rate to 1. 5 %. in doing so, we have removed a substantial part of our accommodative monetary policy, and are clearly approaching the " normalisation range ", which can be estimated to be around 2 % in the euro area. we should reach this level in december. 1 / 4 bis - central bankers'speeches beyond this, i believe that we will probably continue to raise rates, but we may do so in a more flexible and possibly less rapid manner - " jumbo " rate hikes will not become a new habit. a favourable condition to interrupt rate hikes would be clear signs of a turnaround in the core inflation trend. faced with persistent inflation, we have therefore demonstrated our resolve to bring it down towards our target level. i will reiterate here our forecast, our commitment and our capacity : together with the governing council, alongside christine lagarde, we are going to bring inflation down towards 2 % within two or three years. ii. what we differ on today : fiscal measures and energy prices this is the most difficult issue today, for fundamental reasons, not just questions of timing or of personalities. the first steps towards the necessary european coordination have already been taken : taxation of'inframarginal'electricity producers ; principle of collective gas purchases. the banque de france is not an energy specialist ; i would just like to mention two shared lessons. the first is from france : fiscal measures, taken at the domestic level to help households cope with rising energy prices, may be politically necessary as well as effective in smoothing the inflation shock. the " tariff shield " introduced at the end of 2021 explain 3 - percentage points of the inflation differential in favour of france. it can thus help to reduce " second round effects " on prices and wages. but it can only be temporary : it is intended to smooth the shock, not to give the illusion that it no longer exists. the french government will therefore courageously start to reduce support for households by increasing gas and electricity tariffs by 15 % next january and february. the second lesson is from germany : domestic