01 June 2017

Banque de France’s Villeroy de Galhau: Europe must seize window of opportunity

Delivering the annual Tommaso Padoa-Schioppa lecture, Mr Villeroy de Galhau said the recent election of pro-European centrist Emmanuel Macron in France and the German elections in September provided, “a unique window of opportunity” to align euro area reform efforts. “Nothing should be taken for granted, but much is open. We should not let this opportunity pass us by,” he said.

Mr Villeroy de Galhau said that Mr Macron wanted to revive the traditional Franco-German motor of European integration. “Giving French momentum to the European is one of the priorities of the new French president,” he said.

He admitted that Europe is standing at a crossroads, almost a decade after the global financial crisis erupted, leaving “a legacy of foregone growth, high unemployment, and massive public debts.” On top of that, he noted that Europe’s security has been directly affected by the scourge of terrorism “that targets our population and our values.”

And yet, despite all these challenges, Mr Villeroy de Galhau said support for the euro and the EU is still high, according to Eurobarometer surveys. He said the clearest signs of the continued support for the European project, which came despite Brexit, are the recent defeats of the nationalist parties and their Euroscepticism in European countries, notably France, the Netherlands and Austria.

Mr Villeroy de Galhau outlined the successes of the euro in delivering material benefits. These include price stability, which is its main objective assigned to the euro: in the 18 years since the introduction of the euro in 1999, inflation has stood at 1.7% on average, compared with 4.6% in the 18 years preceding the introduction of the euro. Other successes include lower interest rates and exchange rate stability.

But he admitted the weaknesses, including the failure to make structural reforms. He quoted a study by Banque de France showing the opportunity cost of not sufficiently coordinating fiscal policies in the aftermath of the crisis may have amounted to 1 to 2 GDP points in the euro area.

Mr Villeroy de Galhau suggested a series of changes, starting with national structural reforms. “They are a prerequisite for each country to regain credibility in Europe and for unleashing our collective economic growth potential,” he said, accepting that France and Italy have to catch up.

Elaborating on the ideas pushed by Mr Macron during his presidential campaign, Mr Villeroy de Galhau called for a common stabilisation fund equivalent to 1-2% of euro area GDP, financed by borrowing. “This common stabilisation fund would be used under precise rules to reduce macroeconomic imbalances in the euro area, by supporting, through loans, member states’ counter-cyclical policies when they are faced with asymmetric economic shocks,” he said.

And he called for a euro area “finance minister”, even if it requires modifying the existing treaties. “This finance minister would embody and bring to fruition the shared commitment of our member states.” The minister would be both the EU economic commissioner and the president of the Eurogroup, and democratically accountable to the European Parliament

Related to this would be a genuine euro area budget, led by the finance minister. “The euro area budget would be used to finance certain ‘European public goods’ such as digital technology, the energy transition or the integration of refugees,” he said. “It could also include a European-wide unemployment insurance scheme.”

At macroeconomic level, Mr Villeroy de Galhau called for a better euro area policy-mix. “This would help offset the short-term pain of national structural reforms before achieving the long-term gains,” he said, while pledging not to abandon existing rules like the Stability and Growth Pact.

Other measures include: completing the Banking Union; reviewing the incentive schemes for cross-border investments; expanding the supply of financial intermediation services; and making sure that vital financial activities and risks for European economies are properly controlled.

François Villeroy de Galhau's full speech

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