stability, coordination and governance which establishes a comprehensive new “ fiscal compact ” including a requirement for national structural deficit not to exceed 0. 5 % of gdp. these new rules must now be fully implemented by each country. – besides, europe has equipped itself with an instrument to combat crises. at the last european council meetings, it was decided to bring forward the creation of the permanent european stability mechanism ( esm ) to july 2012, and to make it more powerful, increasing the lending capacity of the esm to usd 1 trillion. it is absolutely necessary that this strong tool becomes fully operational as soon as possible. i believe that there is another very important reason why the euro area has been so badly hit by the crisis ; it is because we are a very highly integrated economic area but do not have the appropriate institutional mechanisms for this integration. in particular, this explains the contagion effects and the negative feedback loops between banks and states, which have made matters much worse in the area. obviously, a good and coherent functioning of the banking sector is absolutely vital for an overall solution to the euro area crisis. this conviction is based on two fundamental observations : – appropriate financing is essential for our economies to achieve strong and sustainable growth. in europe, the banking system is the main source of financing, and hence its strength is of crucial importance. however, financial markets naturally also play a key role and they should focus on serving the economy. bis central bankers ’ speeches – secondly, financial stability is critical not just for creating the right conditions for the appropriate financing of the economy. it is also an extremely valuable asset in fostering confidence, which has been severely lacking in recent years and is another key condition for growth. it is also a vital condition for the effectiveness of monetary policy as it allows the normal functioning of transmission mechanisms. in addition, given the feedback loop between banks and sovereigns and the potential impact of a financial crisis on a country ’ s fiscal position, financial stability makes a major contribution to fiscal stability. a smooth functioning of the banking sector is therefore clearly an essential element in the resolution of europe ’ s problems. as a central banker and supervisor, i see three major tools which can help to ensure appropriate financing of the economy and financial stability – both of which are essential financial conditions for sustainable growth. 1. financial regulation and supervision must be tailored to the two objectives of strengthening the financial sector while ensuring an appropriate financing of the economy. of course, after the 2008 financial crisis, the most urgent priority

bundesbank, frankfurt – 26 september 2019 speech in the presence of jens weidmann by francois villeroy de galhau governor of the banque de france « household expectations » ladies and gentlemen, it is a great pleasure for me to open - with my colleague jens weidmann - this joint bundesbank - banque de france conference on households ’ expectations. i would like to thank warmly the bundesbank : this frenchgerman cooperation testifies that our two institutions can promote and contribute to good research on a very topical policy issue. over the past year, the decline of market inflation expectations has been pronounced while households ’ expectations have been increasing quite steadily. this divergence is a challenge for our assessment on inflation expectations. all the interesting papers presented in the next couple of days will illustrate how much we can learn on inflation expectations when observing them outside financial markets. i. inflation expectations : a key issue for monetary policy i. 1. policy relevance for central banks stable inflation expectations at a level close to our target are - of course - key for our monetary policy : they provide a strong nominal anchor helping us to stabilize inflation when facing large demand or supply shocks. since the 1990s, management of inflation expectations through central bank communication has become a standard tool for monetary policy. a lot of evidence suggests that this policy has contributed to anchor inflation expectations and to reduce their volatility, while facing strong inflationary or deflationary shocks. the great financial crisis is a good example : at that time, solid and well - anchored inflation expectations in the euro area contributed to counteract the strong deflationary forces affecting our economies. however, since then, market - based measures of inflation expectations in the euro area have been decreasing and this decline has been even more pronounced since the beginning of 2019. this fall in market expectations has raised some questions among central bank watchers on potential risks of deanchoring of inflation expectations and more generally on our ability to deliver our mandate of price stability. i. 2. the need for better information on households expectations let me stress that market - based inflation expectations are not the only available measures to assess future risks of inflation. professional forecasters or consensus forecast provide a significantly higher figure than the 5y / 5y ils, at around 1, 7 % rather than 1, 2 % to 1, 3 %, although all of them point out to a decrease of inflation expectations over time ( figure 1 ). market - based measures have also some technical limitations