downsizing of the balance sheet. on the other side of the spectrum, japan is little affected by rising inflation. indeed, 2021 growth is lower than in europe ( 1. 8 % vs 5. 2 % i ), inflation returned to positive territory for the first time in a year in september but remains very low at 0. 6 % in november ; and core inflation remains in negative territory at – 0. 6 %. these figures are currently distorted by the sharp fall in mobile phone fees, but the bank of japan continues to expect cpi inflation to be only close to 1. 1 % in 2022 and 2023. not so long ago, many commentators were worried about a possible “ japanification ” of the euro area. they were wrong, and should be reassured today : the ecb ’ s resolute action has been successful in preventing this risk and avoided falling into a trap where economic agents ’ expectations remain deflationary ( “ deflationary mind ” as the japanese often say ). these differences between the united states, japan and the euro area explain the different paces of their monetary reactions. the ecb remains very vigilant about prices and wages dynamics, and will gradually adjust its monetary policy to firmly ensure that inflation recedes soon and then stabilises around its 2 % target over the medium term. in our case, we think that 1 / 3 bis central bankers'speeches this gradual and sequential approach – first tapering, second lift off, and eventually downsizing – is appropriate. but we keep our full optionality about the speed of this sequence, and will definitely be data driven. ii. two great transformations are underway the present covid crisis and inflation hump – serious though they are – should not let us forget the two “ great transformations ” – the ecological and the digital ones – that we will all have to pursue in the long run. i just quoted the seminal opus of karl polany1 in 1944, but i should also mention another famous economist of the last century, joseph schumpeter. they diverged in their prescriptions, but they were both born in europe ( austria - hungary, to be more specific ) and then lived and died in north america. we will need their vision to succeed in the great transformations of our demanding 21st century. 1 / climate change is accelerating. natural catastrophes such as droughts, heat waves, storms, etc. cost usd 250 billion in 2021, a steep increase of 24 % compared with 2020 –

francois villeroy de galhau : rising temperatures - inflation, climate change and digital transformation speech by mr francois villeroy de galhau, governor of the bank of france, at the world economic forum, virtual, 19 january 2022. * * * ladies and gentlemen, it is a great pleasure to have the opportunity to deliver a few remarks at this virtual edition of the world economic forum today. as you may have expected from a central bank governor, my remarks will first be about inflation, with a comparison of the situations in europe, the united states and japan. i will then briefly touch upon the two great transformations underway, ecological and digital, which will shape our future. by the way, inflation and climate change share a common feature : rising temperatures … which could be the subtitle of my introductory statement. i. inflation in europe, the united states and japan the strong rebound in 2021 was obviously excellent news for our economies, which have suffered on a scale never before experienced by current generations. over the last few months, inflation has accelerated, primarily because of tensions in energy and shortages in commodities and intermediate goods. its magnitude varies across countries : in december, inflation stood at 7. 0 % in the united states, higher than the 5. 0 % observed in the euro area, and in sharp contrast with the 0. 6 % observed in japan in november. this common transatlantic trend calls for a common vigilance from central banks, and a change from the very accommodative monetary policy rightly – and successfully – pursued in 2020 to face the covid crisis. that said, let me stress some intercontinental differences. the us economy recovered faster and more strongly than that of the euro area, notably due to the very large fiscal stimulus after the covid crisis. in december core inflation, excluding food and energy, was 5. 5 % in the united states and 2. 6 % in europe, showing that the dramatic increase in energy prices in 2021 does not stand as the sole explanation for this recent surge in overall inflation. the labour market is also much tighter in the united states : the labour force participation remains lower than before the crisis, and there is a large decrease in unemployment, to 4. 2 % in november 2021 compared with 7. 2 % in the euro area. these differences explain why monetary policy accommodation is removed more quickly in the united states with the fed seemingly contemplating three significant shifts in a row : tapering of purchases, lift off of interest rates,