23 April 2012

Christian Noyer: The situation in the euro area

Introduction by Mr Christian Noyer, Governor of the Bank of France, at the Paris Europlace Financial Forum Luncheon, in which he addressed the situation in the euro area, saying that the important steps already taken to exit the crisis now need to be further enhanced.

When you compare the situation of the euro area in the first quarter of this year with that in the second half of 2011, the contrast is striking:

• Conditions in bank funding markets are much better. For instance, euro area banks have already issued about €70 billion in senior unsecured debt so far this year, which is well in excess of what they did in the whole of the second half of last year.
• The money markets are in much better shape as well: EURIBOR-OIS spreads have narrowed substantially, signalling a lowering of risk premia; the US money market funds seem to be re-opening access for euro area banks.
• Tensions on sovereign debt markets have also eased: 10-year Italian bond rates have shed around 200bps since early December; Spanish rates have also decreased significantly in spite of recent renewed tensions.
• Although at a low level, overall economic activity is stabilising, as is bank lending.

There are concerns that too abrupt an adjustment in public finances will be detrimental to growth and, ultimately, to fiscal consolidation itself. In the current circumstances facing Europe, I believe these concerns are misplaced. We have to look at the counterfactuals: delaying consolidation would expose our economies to even greater risks. At current debt levels, economic agents are very “Ricardian” and would react to fiscal permissiveness by delaying their own private expenditure. Financial markets would continue to impose very punitive interest rates on our countries to compensate for the uncertainty in the fiscal outlook. Overall, the confidence and financial benefits of fiscal consolidation far outweigh its negative effects on effective demand in the short run.

The euro area has already demonstrated its determination and ability to take decisive steps to exit the crisis. Many more remain to be taken, and all of the players – the banks, governments, European institutions – need to continue to face up to their responsibilities. The Eurosystem is providing the European economy with key elements of stability. First and foremost, we are providing price stability and will continue to take all necessary measures to fulfil this mandate. Moreover, our recent exceptional and temporary measures should be seen as a window of opportunity for banks to strengthen their balance sheets and for governments to step up their efforts in a less troubled financial environment.

Full speech

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