19 November 2018

François Villeroy de Galhau: Challenges and opportunities in Europe and beyond

1. Our European challenges and opportunities

Let me first speak about the gradual normalisation of our monetary policy. The broad-based expansion of the euro area economy is continuing, although at a more moderate pace. Despite a slowdown in the first half of the year, GDP growth is still expected above potential in 2018, even if the output gap is closed. 9.2 million jobs have been created since 2013 and the unemployment rate has fallen from 12.1% to 8.1%. Recent soft and hard data on economic activity have been somewhat weaker (EA GDP growth for the 3rd quarter was released at 0.2% qoq, due also to exceptional factors in Germany), although less so in France (French GDP for the 3rd quarter was up 0.4% qoq). But our outlook for inflation is firmer. There are increasing signs that the labour market is tightening and nominal wage growth is picking up: the Phillips curve is back to work, albeit a bit later than expected. At the Governing Council of the ECB, we are thus confident in the sustained adjustment in inflation back to our objective. [...]

Another and somewhat related challenge – as monetary policy cannot be the only game in town – is the continuation of structural reforms in countries where they are needed. [...]

Third challenge: Brexit. It is bad news first and foremost for the United Kingdom, but also for Europe, and we hope that the draft agreement the negotiating teams have reached last Tuesday can be finalised. However the European financial system will inevitably be restructured. Instead of a single City for the continent, we expect an integrated polycentric network of financial centres, with specialisations based on areas of expertise. This is an opportunity to improve the circulation of the abundant savings in the euro area – a surplus of over EUR 400bn – towards equity financing and innovation.

Paris is well qualified to become the market hub of this new euro area network. It hosts one of the most developed capital markets in continental Europe, four global banks, the first insurance and asset management industry, a leading bond market, the largest commercial paper market with NEU-CP and the largest private equity investor in continental Europe. In addition, French financial authorities, including the Banque de France, are working together to facilitate the dissemination of sound and safe financial innovations and fostering the scaling up of sustainable finance. [...]Moreover, a number of international banks have decided to transfer the bulk of their market activities to Paris, and Japanese financial institutions will always be welcome in Paris.

2. Beyond Europe, our collective questions

Let me turn to the global questions that we have to address together, starting with Japan and France. I guess our views are very close here. There are increasing tensions in the global environment, starting with protectionism. Beyond the direct trade policy shock resulting from a rise in import tariffs, two factors at least may amplify the decline in global GDP: a decline in investment demand caused by firms’ falling business confidence due to uncertainty, and a rise in the financing cost of capital due to an increase in actual or perceived borrower risk. [...]

Full speech

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