francois villeroy de galhau : what are the economic prospects for the euro area? speech by mr francois villeroy de galhau, governor of the bank of france, at the conference at luiss university, rome, 29 november 2018. * * * ladies and gentlemen, i am delighted to be here with you this evening at luiss university, in the magnificent ballroom of the villa blanc, and i would like to extend by warmest thanks to vice president paola severino. luiss university is renowned for the high standard of its teaching and one of your illustrious former presidents, guido carli, who gave his name to your university, was also a signatory to the maastricht treaty in 1992. i am here to speak to you today as a friend of italy, a country which i hold very dear. for several years in my professional career, i made monthly visits to rome and had the pleasure of learning your language. i am pleased to see my friend governor ignazio visco here, as he is also my closest neighbour in frankfurt : we sit next to each other on the governing council. i am also here as a committed european, one who is familiar both with germany and belgium. this commitment is also shared by sylvie goulard, who is here today in her capacity as deputy governor of the banque de france. i am very much aware of the challenges facing italy today – including, until very recently, the flow of migrants – all the more so because of our shared culture and history, and, today, our shared institutions and challenges. as a central banker, however, i am going to focus on the economic issues, and notably on our shared currency and the euro area. * * to start with, let me just remind you of some stylised facts about italy, which are often too quickly forgotten. italy has many strengths : it is the euro area ’ s second largest manufacturing economy, after germany and ahead of france. its export performances have improved in recent years, thanks notably to an increased specialisation in high - end products1 and to the talent of its imprenditori, from brescia to bologna. moreover, thanks to the reforms undertaken by successive italian governments since 2012, its macroeconomic position is on the whole solid [ slide ]. to highlight just a few key figures : its net external position is almost balanced ( - 5 % of gdp in 2017 ), and better than france ’ s ; its current

banks have moved to an implementation framework centred on steering short - term interest rates. like other equilibrium concepts – such as potential output or the equilibrium exchange rate – r * is unobserved and has to be estimated. empirical estimates of r * should satisfy the following requirements : r * estimates should be unaffected by cyclical and short - term movements in economic aggregates ; and they should not depend on monetary policy, reflecting the principle of the long - run neutrality of money. 3 thus, r * estimates should only reflect real and longer - term – i. e. structural – changes in the economy. at the snb, we use a wide range of models to estimate r *. some focus on potential growth as a determinant of r *, while others distinguish between domestic and international factors that affect r *. we also use financial market expectations of real interest rates in the long run as a measure of r *. in chart 2, we see a range of estimates from these models for switzerland. the downward trend of r * in switzerland is similar to that in other countries. the range was fairly narrow before the covid - 19 pandemic. since the pandemic, however, it has widened. r * estimates are subject to considerable uncertainty. let me highlight two sources of this. the first is uncertainty about the ‘ right ’ model. chart 2 shows us that the estimates from the models can differ substantially at times. the second is the statistical uncertainty surrounding cf. wicksell ( 1898 ). some have argued that monetary policy itself may have caused the persistent downward trend in r *. cf. schnabel ( 2024 ) for an overview of the arguments. page 3 / 11 the estimate of a specific model. this is evident from the occasionally wide statistical confidence bands around point estimates. 4 the uncertainty surrounding r * estimates complicates their use in the monetary policy process. nevertheless, neglecting r * in practical monetary policy considerations would be a mistake. monetary policy decision - making with uncertain r * therefore, i would like to address the question as to how monetary policymakers can deal with the uncertainty surrounding r * estimates in practice. i will first discuss how to arrive at a measure that can be employed usefully in the monetary policy process despite this uncertainty. i will then explain how both our monetary policy framework and our risk management approach help us deal with uncertainty. policy - relevant r * estimate given the substantial statistical uncertainty surrounding r * estimates, it is important