19 September 2019

François Villeroy de Galhau: What economic sovereignty for Europe? Facing the threats with lucidity, and boldly seizing an opportunity

The Governor of the Banque de France proposed that, in the current crisis of globalisation, Europe doesn’t need to keep its head down; it should assert and propose a model – its own social, environmental and multilateral model.

I. Lucidity in the face of two economic threats

There are currently two main types of challenges to Europe’s economic sovereignty: the first are linked to political decisions (“man-made”); the second to the emergence of technological powers whose reach extends beyond the confines of individual states (“tech-made”). At the top of the list of political threats are the protectionist tensions stemming from the United States, but also the uncertainties surrounding Brexit. They are weighing on our multilateral order and already contributing to the global economic slowdown: iii in the space of a year, the 2019 forecast for world growth has gone from 3.9% to 3.2%, and for the euro area from 1.8% to 1.1%. iv This loss of growth occurred even before tariffs were raised, and for a reason that is often underestimated: protectionist uncertainty reduces business leaders’ confidence in the future and leads them to postpone their investments. Britain under the threat of Brexit has been a clear illustration of this private sector confidence deficit over the past three years [the Bank of England estimates that business investment is 20-25% below its previous trend], and even the United States is beginning to suffer. Faced with this situation, political leaders – and one of them in particular – have the most important role to play: it is up to them to restore the confidence they have undermined. Monetary policies do their part by keeping interest rates low in the face of the slowdown, but they cannot tackle the underlying cause.

For the euro area, these uncertainties are being compounded by a painful paradox: the causes of the slowdown are largely external, but the region is being acutely affected. This imbalance is attributable to the weight of Germany, which is highly specialised in the manufacture of capital goods and “overexposed” to global trade. It nonetheless also illustrates the fact that Europe needs to make greater use of the scope it has to respond: it has less public debt (81% of GDP) than the United States (106%) or the United Kingdom (87%), but it makes less use of fiscal stimulus, especially in Germany.

In addition, the expansion of the euro’s international role would be a useful means of consolidating our economic sovereignty. The euro is 20 years old and it is our success: it ranks second in the international monetary system, but it still needs to increase its importance at the global level. The dollar remains a key pillar of America’s global power, and China is taking a greater interest in the internationalisation of the renminbi.

The other major threat to Europe’s sovereignty is technological. Of the large digital corporations – the GAFA and other bigtechs – whose power equals that of sovereign states, none is European. And Europe is seriously lagging behind in investment: in 2015, the euro area’s stock of information and communication technology (ICT) capital amounted to 7.6% of GDP compared with 10.9% in the United States.v Yet Europe has the advantage of having a single market: you can see what happens without it with Brexit and the cost of a “no deal” for the British economy. But we need to be more bold.

In the financial sector, the bigtechs have the potential to cause a genuine “Big Bang”: they have a strong brand image, a global client base and privileged access to new technologies. Of course, financial regulation needs to remain neutral vis-à-vis technology: the principle of “same activity, same rules” needs to be applied to maintain a level playing field for all players. But we need to increase international cooperation in four key areas of the regulation of digital finance: (i) cyber-security; (ii) data protection; (iii) preserving competition in the face of the risk of ultra-dominant networks and private monopolies; and (iv) fair cross-border taxation. Facebook’s Libra is a prime example of a case where cooperation is imperative. The G7 under the French presidency underlined the challenge this poses for sovereignty, and wants to address some “serious regulatory and systemic concerns”vi before such projects can be implemented.

II. Boldly seizing the opportunity of a social, environmental and multilateral model. 

Europe, if it is bold enough, is in a good position to provide concrete answers to the expectations of the world's citizens. The new Commission, led by Ursula von der Leyen, has the means to achieve this ambition. In my view, the "European model" is articulated around four requirements: the fight against inequalities, the promotion of individual autonomy through education and knowledge building, the preservation of the climate, and the renewal of multilateralism. By the way, we are talking here about a “European model” and not a “European way of life” which has been discussed a lot in recent days. In short, Europe can proudly define itself as a social, environmental and multilateral model. [...]

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