28 November 2019

François Villeroy de Galhau: European and French economic outlook and post-Brexit financial architecture

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, in which he elaborates on the European and French economic outlook, before turning to the future European financial architecture after - and beyond - Brexit.

I. Causes of and answers to the current European slowdown

The causes of the European slowdown initially lay outside the euro area: of these geopolitical uncertainty is undoubtedly the most important; it is mostly man-made, and must be fixed by man. We are witnessing a significant slowdown in global trade due to the escalation of trade disputes. The consequent loss of global growth could reach up to 0.8% next year according to the IMF, mainly due to indirect effects, beyond tariffs: the fall in business confidence and investment, the decrease in productivity. Similarly, the twists and turns of Brexit have created market volatility and weighed on business investment. The effects of the slowdown are very acute in the euro area's biggest economy, Germany, which is very much exposed to global trade. Structural trends are also at play. We observe a downward trend of productivity growth - which is considered by some as "secular", jumping perhaps too hastily to a very long-term conclusion. Furthermore, the ageing of the population means the labour supply is shrinking and potential growth is falling. [...]

Speaking about financial stability, let me add a few words on Basel III. The agreement reached in December 2017 is the finalisation of an unprecedented and fruitful regulatory effort that began in 2009. I strongly reiterate that: it is a fair and reasonable compromise. The US had to accept the permanent recognition of internal models elsewhere, although their banks don't use them; and both Europe and Japan had to accept an increased comparability of these internal models, leading to some increase in their capital requirements. Some people, starting with banks themselves, are now contesting the agreement. I would like to make a clear pledge: the Basel III agreement is intended to apply everywhere in a consistent manner, including of course in the United States. Those anywhere who would recommend not transposing Basel 3 would give in to the temptation to forget, ten years after the Great Financial Crisis; they would take the responsibility of increasing financial stability risks, at a time when these risks are already significant. That said, rest assured that we will insist on a fair and reasonable implementation in Europe, taking into account the specificities of the European banking sector in order to avoid undue impact on capital requirements.

[...]

III. Beyond Brexit, building a new European financial architecture

Brexit is and remains bad news for everybody but above all for the British economy. On our side, we are ready to face any outcome: the financial industry has been prepared. Even with a welcome withdrawal agreement, all aspects of a possible trade agreement and its financial services component will still have to be negotiated in 2020. The uncertainty surrounding Brexit will therefore continue.

Whatever, the UK will continue to participate in international forums where cooperation will be much needed to face our common challenges, including with Japan. In this respect, I would like to stress the strong convergence between France and Japan on numerous international issues, and notably the defense of a multilateral order, taxation, digital regulation and green finance. The excellent cooperation between our respective G7 and G20 Presidencies this year proved it eloquently. I also heartily welcome the cooperation agreement that was signed between Paris Europlace and FinCityTokyo in June.

Now, we have to look beyond Brexit. We expect Europe's financial services architecture to move from being monocentric, centred on the City of London, to a more polycentric model. Paris has major assets which it can build on to enhance its central role in this post-Brexit European financial architecture. Firstly, it benefits from a strong financial ecosystem: our capital city is a leader in key activities such as life and non-life insurance and in asset management; it is home to four of the euro area's eight global systemically important banks, and to two of the three European Supervisory Authorities - ESMA and the EBA. Secondly, Paris is bolstering its position as a European leader in digital innovation. Last year, the ACPR has launched a task-force on artificial intelligence. Paris has also been a pioneer in the development of sustainable finance. The creation of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) by the Banque de France in Paris in December 2017 has been a decisive step forward. In 2 years, this coalition of the willing has increased from 8 founding members to more than 50 members from all 5 continents.

Full speech

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