François Villeroy de Galhau: The future of the European Economic and Monetary Union

14 November 2019

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Economy day 2019, in which he mentions the need to overcome four clichés in order to optimise the euro area and outlines three major challenges to strengthen euro area banks.

The first one that needs to be overcome is the somewhat lazy idea that economic union is a substitute for national reforms. Mr François Villeroy de Galhau wants to make this clear from the start: on the contrary, national reforms are a prerequisite for reinforcing the economic union.

Second, there is need to stop reducing the debate to an old opposition between “German rules” and “French spending”. In the face of German fears, which he understands, he wants to make a clear pledge: there is no question in his eyes of creating a “transfer union” that would only benefit certain countries, or of creating eurobonds that would equate to a pooling of debt.

Third cliché: other countries have gained more from the euro than we have. Unfortunately, this cliché is repeated everywhere, including in Germany. In reality, the euro has benefited all countries, including – and especially – Germany.

Fourth cliché: the ECB’s monetary policy has betrayed its mandate. This idea was propagated in a recent “memorandum” by a number of former central bankers. Mr François Villeroy de Galhau has every respect for them as people, but he disagree with their argument. They unfortunately chose to ignore the positive results of non-standard monetary policies.

Meeting three major challenges to strengthen euro area banks.

Low interest rates - negative rates are not an end in themselves, and central bankers, are aware of the difficulties this represents for banks. First, the effect of monetary policy on banks is not limited to exerting pressure on the net interest margin. It is broader and also has positive aspects that are too often overlooked: lower financing costs; a lower cost of risk due to borrowers’ improved solvency

Digital challenge - the digital transition is an important strategy for reducing costs. Financial institutions can unleash productivity gains by exploring even further the possibilities of automation and artificial intelligence. However, in the short term, IT investment costs are significant, while potential profitability gains can only be generated in the medium and long term. This challenge is even more complex for medium-sized banks, and those that do not have sufficient financial capacity. The costs of digitalisation – in investment – are mostly fixed; its gains increase in proportion to size.

Consolidation of banking institutions in the euro area - because of a still incomplete Banking Union, the European banking sector remains too fragmented compared to the US market: the market share of the five main European banks stands at 20% against more than 40% in the United States.

Full speech on BIS


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