A Conversation with François Villeroy de Galhau

Thursday, April 11, 2019
Axel Schmidt/REUTERS
François Villeroy de Galhau

Governor, Bank of France

Paul J. Sheard

Senior Fellow, Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School

SHEARD: Well, welcome everybody to today’s Council on Foreign Relations meeting, a conversation with Bank of France Governor Villeroy.

I’m Paul Sheard. I’m a senior fellow at the Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government. And it’s a pleasure to be here.

I think Governor Villeroy is well known to everybody. He assumed the position of the governor of the Bank of France on 1st of November, 2015. Prior to that, he held senior management executive positions at BNP Paribas since about 2003, and before that had a very illustrious career at the French treasury.

So we’re delighted to have him here with us this morning, this opportunity.

So let me lead off, Governor. And again, welcome to the Council on Foreign Relations. Perhaps you could share some thoughts on what you see as the outlook for the eurozone economy at the moment. How’s it going? It seems to have flagged a little bit, but how do you see it?

VILLEROY DE GALHAU: First, good morning to everybody. And let me say how pleased and honored I am to be the guest of the Council on Foreign Relations.

To go to your questions, allow me first a long-term view because the eurozone just celebrated its twentieth anniversary. You are conscious that the euro economy was introduced in January of ’99.

And so I circulated some slides, I don’t know if you have them, but just to comment on the long-term view, go to slide number six—this one—which is maybe a bit surprising to you.

We compare the long-term growth and employment patterns of the eurozone versus the U.S. and it’s not that different. If you look at the yearly growth of GDP per capita, 1 percent in the eurozone, 1.2 (percent) in the U.S., and the difference focuses on two years, 2012 and 2013, where we had a specific eurozone crisis. And if you look at the employment increase, it’s very parallel in both economies with significant job creation, ten million, in the eurozone since 2013.

So the long-term view, including the recent years, is quite favorable. We still had a growth of 2.5 percent in 2017 and 1.8 percent last year. But—and, Paul, this is your point—we had a slowdown this year. Let me say some words about the forecast.

Our forecast, ECB forecast, is 1.1 percent for this year. We just published this morning the professional forecast, senior economists, 1.2 percent and the IMF is slightly more optimistic with 1.3 (percent). But everybody expects a slowdown and everybody expects an improvement next year, so with a recovery around the second half of this year. We see exactly the figures.

One important point about the governing council we had yesterday, it was a governing council without new forecasts. You are probably aware that we publish new forecasts each quarter, so it was March and it will be June.

But we should probably look at the eurozone and the average figures I just quoted in a more different-shaded way. And obviously, the situation is quite different today between the four major European economies: Germany and Italy on one side and France and Spain on the other side.

But a last comment about the eurozone as a whole. It’s a slowdown, it’s not a recession. I already repeated yesterday that the probability of a recession remains very low. And we shared this analysis yesterday. So we will probably come to our monetary policy stance. We didn’t change it, but we said very clearly that we are determined to be as accommodative as needed for as long as necessary to reach our inflation target.

SHEARD: Great, thank you. France, of course, is the second-largest economy in the eurozone and you’re the Bank of France governor. Could you give us a little bit of your insight into the French economy in particular? And you clumped or sort of categorized it there with Spain vis-à-vis Germany and Italy.


SHEARD: But perhaps a little bit on the French economy.

VILLEROY DE GALHAU: No, no, it’s a good opportunity to differentiate a bit, as I said. As you know, the four major economies in the eurozone—Germany, France, Italy, and Spain—together are about three-quarters of the—of the GDP, so it’s significant. And we have a quite different picture today between Italy, which is more or less at zero percent growth, and they had even a technical recession at the end of last year for all the reasons we know, Germany, which is a question mark and with the most significant slowdown due to idiosyncratic factors—we all heard about the new automotive test about the low level of the Rhine last summer. It’s a first economic effect of climate change, by the way. But also and probably most importantly external factors with the slowdown of world trade mainly focused on Asia.

And this is, by the way, the most impressive economic phenomenon we see at present. When you look at the evolution of world trade in manufacturing, it’s a very significant slowdown in the second half of last year with even stagnation or a slight recession in January. It’s the last figure we have. This affects more than others the Germany economy.

If I come to France, it’s more resilient. We had growth last year of 1.6 percent and we expect growth this year of 1.4 percent. So it’s a very limited slowdown due to two elements: First is the fact that the French economy is less exposed to Asian trade and Asian export, which might be a drawback in brilliant years but which is a protection in such years. And the second reason is that internal demand is very resilient.

Again, going very quickly through my slides, go perhaps to slide two, which is a very simple comparison of the expected growth of the G-7 economies this year.

Obviously, the U.S. economy is ahead. But you see that France is a very close third to Canada and that Japan, Germany, and Italy are lagging behind. So the French resilience as well as the Spanish resilience, which is expected at around 2 percent, will help to protect eurozone growth.

If I focus one last minute on the strength of internal demand—if you’ll come to slide three, and I will have come forward in this very quick minute, thanks to you for most of my slides in ten minutes—you see that purchasing power—this one—is expected at around 2 percent growth per capita this year, which is the strongest growth in the last twelve years. And it will help domestic consumption.

The key question probably is, what will be the savings rate? We expect it to increase a bit, but then to stabilize. And it will help—it will help domestic growth.

One last comment about the reason for this very strong purchasing power, which can seem as a paradox because you’ve probably followed with interest this gilets jaunes movement we had at the end of this year, these yellow vests, which were focused on la pouvoir d’achat as we say in French, purchasing power. And it’s not an unusual paradox that such a request comes stronger when economic news are already better. And there are also distributional aspects in this debate. I always quote averages so I don’t say that everybody has such an increase of its purchasing power.

But the drivers of this increase are threefold: First, very strong job creation in the last three years. Between ’16 and ’18, the French economy created almost eight hundred thousand jobs, which was an unprecedented performance.

Second now, a wage increase and this is a general trend we see in the eurozone zone, which is a favorable factor. And a key question will be how this wage increase links to the improvement of the employment situation. Will it pass through to core inflation? We could perhaps discuss this issue later.

And a third driver, French specific, are the—is the fiscal package decided by president—after this yellow vest movement last December of around 0.4 percent of GDP. And let me stress, if I am allowed to have one—(inaudible)—demand, as an independent central banker, I’m not expected to welcome a fiscal package, especially in a country with a rather significant level of public debt. But if I look at the economic content of this package, it was rather well-designed. The main measure was an increase of what we call activity premium. To put it in American terms, it’s exactly an earned income tax credit, so for working poor and to encourage people to get new jobs or to work more. So it was—it made economic sense. It was not an increase of the minimum wage and this is very important.

So all those elements combined helped the resilience of the French economy.

SHEARD: Thank you very much for that overview. So you mentioned the governor council meeting yesterday. And I understand you came directly from that.

VILLEROY DE GALHAU: Yes, from Washington.

SHEARD: No rest for the wicked here.

VILLEROY DE GALHAU: For the Council on Foreign Relations, directly.

SHEARD: Exactly. Now, obviously, no changes to policy yesterday, but you did make an adjustment in your forward guidance around the, you know, earliest point at which you could adjust interest rates, you know, presumably upwards.

VILLEROY DE GALHAU: This was last month, this was not yesterday.

SHEARD: No, in March. No, you didn’t change yesterday, but you made that adjustment in forward guidance in March. But anything sort of hot off the presses that came out of the governing council? Certainly, one thing that caught some people’s eye—and this may not be new news, I’m not sure—but the reference to looking at the mitigating potential side effects of negative interest rates on bank intermediation and how that might, you know, potentially come to fruition.

VILLEROY DE GALHAU: Perhaps three quick comments. But as you said, it was not a council for decision. First, we confirmed our monetary commitment, and this is very strong, that we are ready to be accommodative for as much and as long as necessary to reach our inflation target. And it’s very important to have a very clear determination in such uncertain times.

Second, that in the framework of our regular assessment, as we said, we will assess the effects of negative rates and the possible need for mitigating measures, but let us now work and then decide. It would be a technical discussion.

And third, if I can add, in the situation we are in, it is true in the euro area, it’s true elsewhere, monetary policy cannot be the only game in town. And it’s also important that it’s not up to us central bankers, but it will be an important discussion here in Washington in the coming days that we discuss also about the other economic policy measures we should implement at national or at coordinated levels to face this present slowdown, especially if it should last a bit longer than expected.

SHEARD: Thank you. One area that is often talked about—and maybe we’ll get some questions on this—in the context of the eurozone is the banking system and particularly concerns about, you know, still, I think Italy probably is top of that list, but, you know, even other larger economies that may have exposure to banking system issues. Could you say a little bit about your assessment of the strength or otherwise of the banking system in the eurozone? How much of a concern is it and how much of a risk factor do you see?

VILLEROY DE GALHAU: No, I will not comment about any specific bank, but let us look at the picture as a whole. And if you look at the health of the banking system, we should probably look at two figures: first is the level of capital and second is the level of profit within equity. If you look at the level of capital, it has been significantly increased in the eurozone as it has been in the U.S. and in other jurisdictions. So this is very important to be aware of because Main Street sometimes thinks that it’s business as usual, back to the pre-crisis level. No, it’s not. And as a whole, banks doubled their level of equity in the last ten years, let’s say, as a result of the regulatory requirements introduced in a cooperative manner. It’s very important that we stick to that. The price, the cost of the financial crisis has been very high in this country, in Europe, elsewhere, and so banks are now safer. And that we implement until the end this international regulation, including Basel III. So it means take it as a magnitude for the European banks the level of capital, called tier one, around 14 percent today.

If I now come to profitability, return on equity is about 7 percent. It’s close, a bit higher than the level for the British banking system. It’s close to the level of the Japanese banking system. It’s, in the most recent period last year, a bit lower than in the U.S. Again, these are averages. And obviously, the economic situation in the U.S. is more favorable, the level of the interest rates is higher, so it’s why we can explain this difference.

It doesn’t mean that we are at the end of the road. Again, the figures are not so bad and not as bad as sometimes rated. They are much better for the level of capital. They have improved for return of equity, but it’s not the end of the road.

Nobody should expect probably return on equity to come back to the pre-crisis level. If you doubled the level of equity, it’s normal that return on equity is smaller. But it’s not the end of the road. And most European banks are engaged in a very significant transformation task, including digitalization. And digitalization is obviously not only for fintechs or new entrants, it’s mainly for incumbents, which means very significant investment.

Second, diversification of revenues. If I look at French banks, they are probably amongst the most diversified. When you are in an environment of low rates, it’s better to have higher fees and, to give an example, bank insurance. So they sell insurance products and this kind of diversification is very positive in my eyes.

And the last element is consolidation. And this is more specific probably to the European landscape. Consolidation is much more advanced in this country here in the U.S. It could mean domestic consolidation. I will not comment on any specific example in one important European economy you could think of. (Laughter.) But it also means and probably still more cross-border consolidation, which would have the benefit of size, scale as domestic consolidation, but also the benefits of strengthening the banking union and the cross-border allocation, better allocation, of private savings. And this is what we need clearly.

To give you a last figure perhaps, if I look at the four, five most important American banks, commercial banks, they have a market share in the U.S. after the consolidation move of the last ten years of a bit more than 40 percent. If I look at the five most important European banks in the eurozone, they have a market share of about 20 percent. So there is room for improvement.

SHEARD: You mentioned—

VILLEROY DE GALHAU: While preserving competition, obviously.

SHEARD: You mentioned the banking union there. Obviously, that’s one of—been one of the major sort of institutional developments in the last few years coming out of the sovereign debt crisis and, you know, the whole question of how to complete the economic and monetary union. That’s fairly well-advanced. There’s still the deposit insurance piece, which is still sort of outstanding. But capital markets union is another major theme and I think you’ve been talking recently more generally about financing market or financial union more generally. You know, any quick thoughts about how that whole agenda is playing out? What are the key stumbling blocks? What is the outlook for progress there?

VILLEROY DE GALHAU: This is a very important question, Paul, if I can elaborate for a minute. First, I published last week with my German friend and colleague Jens Weidmann, president of the Bundesbank, a joint paper on this capital market union and more broadly what we called together a financing union for investment innovation.

My favorite slide—it might be the last one—is slide eight, if you can—if you can take it.

And let me elaborate somewhat because this is very important about the strengthening of the economic union. I said earlier that monetary policy should not be the only game in town. Some of you might probably remember that at the start of the euro, the project was called economic and monetary union. If I look at the track we called for the last twenty years, monetary union is a success without any doubt. It delivered its promise of price stability. It delivered growth and employment. I showed you the chart. And most importantly, it has very strong, popular support. You will see some figures—75 percent of eurozone citizens want to keep the euro, 81 percent in Germany. This is probably the most important figure. It’s sometimes underestimated outside of Europe, but there is a very strong political support for the euro, which explains some political decisions in the past, including in Germany.

But economic union, besides monetary union, is still to be achieved, to say the least. And we had many discussions, as you know, about that in the last year. There is a public part of the discussion—we might perhaps come to it—about the eurozone fiscal capacity or strengthening the European stability mechanisms, the ESM. It’s important. But there is a private part of the discussion, which is less often mentioned and which, for me, is at least as important. And this is what this slide is about. What is the idea that we should add banking union and capital market union to better use the abundant savings we have in Europe and to allocate it better through the borders to our investment needs.

So you see on the left, these are our saving resources. And as a eurozone has an external surplus, it has a surplus of savings towards investment of 340 billion euro last year. But we have significant investment needs. Think of digitalization, think of green transition, and think of SME scaling up. Corporate equity is unfortunately less developed in the euro area than it is in the U.S. To give you again an average, corporate equity to GDP is 80 percent in the euro area and more than 120 percent in the U.S. This is very important as we are in an innovative economy. We all know that you finance innovation better through equities and through debt. So to develop equity would be a very strong purpose of such a financing union.

We should not oppose banking union and capital market. And there is sometimes this presentation saying European—the European economy should become American and substitute bank channel through the capital market standard. Partly yes, but this is not for me. The bulk of the story, we should add the two channels. And if I focus on the banking union, we make decisive progress on what we call the first pillar, supervision, it’s operational. We have now fully centralized supervision for the one hundred thirty most important European banks.

But we still have to complete the two following pillars. I don’t know if you remember, the second pillar is resolution, so how we deal with banks in trouble, and the third pillar is what we mentioned about deposit insurance.

My personal view is very strongly that there is a logical order. We started with the third pillar, supervision, we should now complete as a priority the second pillar, resolution. It’s more technical. It’s less often mentioned, the deposit insurance, because if allow me, everybody understands when you speak about common deposit insurance. When you speak about resolution, it’s difficult to speak to public opinion in a simple way.

But it’s more important, we’ve made progress in the last December package, but we are not yet there. And I would say that the third pillar could come at a later stage. We know that it’s possibly very contentious and it’s probably economically slightly less important. Let me stress this change of priority.

So to accent, to conclude, is, public mechanisms are important, but private ones are at least as important and probably less politically difficult. It’s why I advocate such a financing union. And within the banking union, the second pillar is more important than the third one at present.

SHEARD: Excellent. Thank you very much. Not to end too much on a—this part of the conversation on a—on a sort of a negative note, but there’s a lot of discussion, we hear them at these meetings and elsewhere, about what sort of policy ammunition will central banks and fiscal authorities have, you know, in the next downturn, you know, if it comes or should it come. Obviously, you’ve still got negative interest rate policy. You have, if anything, sort of extended your monetary accommodation. But in terms of, you know, thinking about that issue and planning for the worst, what would you—what would your message be around the kind of tools that the ECB in particular would have to deal with another serious downturn?

And you mentioned before fiscal policy and it’s always a little bit of an, obviously, sometimes an embarrassment between fiscal and monetary policy. Everybody kind of agrees, fiscal policy should be doing something a little bit different, but half the people think it should be consolidation, half the people think it should be expansion.

But when you sort of think about the next downturn, should it come, how do you see the toolkit that you have? And how will you see the scope potentially for more monetary and fiscal coordination, cooperation in the eurozone in particular?

VILLEROY DE GALHAU: It’s a wide-ranging question.

SHEARD: Yes, I’m sorry. I mean—

VILLEROY DE GALHAU: No, we’ll probably come back to the question of fiscal versus monetary. I would add also structural reforms, which are an important part of the answer. But obviously, fiscal policy should be differentiated depending on the present situation of public finance, it’s also true within the eurozone.

But can I focus on monetary policy? First to remind you that this is not our central scenario at present. So it’s too early to tell what we would do, but let me express a very simple conviction: We are not short of ammunition and we are ready to use all our options whenever necessary. It’s our mandate. We did it in the past, we could do it in the future.

Probably the most telling answer to your question is to deal with this question of Japanization, which sometimes comes as a fashionable picture, a fashionable word. But it’s fashionable; I don’t think it’s accurate. And could I elaborate somewhat about that? The eurozone is not in a situation of Japanization. We could also discuss whether Japan is in a situation of Japanization as incorporated in this concept.

But let me focus on the eurozone. It’s a quite different situation if I look at it economically and even financially and from a monetary point of view. If I look at the eurozone economy and if you look at nominal GDP growth last year, 3.3 percent in the eurozone, 0.7 percent in Japan. And this is very important, nominal GDP, because you have to compare it with the level of nominal interest rates. And you see that there is much more room for maneuver.

If I look at inflation expectations, they are around 1.5 percent, slightly below in the most recent week in the euro area, a bit above zero percent in Japan.

And if I can give you two last figures to the financial and monetary part of the story, the level of debt—debt, I mean public debt plus private debt from households and nonfinancial companies—it’s 360 percent to GDP for Japan, 205 percent for the euro area, a significant difference between public debt and private debt.

And if I look at the size of the central bank balance sheet, 100 percent of GDP for Japan, 40 percent for the euro area. So it’s part of the answer to your question about our level of ammunition.

SHEARD: Great, thank you very much.

So at this point, I would like to open the whole meeting to our members and just remind you that when you ask a question if you could just ask one question, state your name and affiliation, be quite concise. And if you just put your tent card in a vertical position, I can collect the questions.

VILLEROY DE GALHAU: And we could perhaps say some words during the round about Brexit, which was supposed to be the theme of the day. (Chuckles.)

SHEARD: Right. So let me—as people are—

VILLEROY DE GALHAU: Due to the good news of yesterday, we shouldn’t forget.

SHEARD: Give people a chance to gather their thoughts and put their tent cards up, let me take that opportunity and just ask you very quickly about Brexit—unless Eric was going to do so. (Laughter.)

But obviously, that was the big news yesterday. But can I ask you a very—you can talk about this more in the Q&A—but a very kind of rather specific, more central bank watchers question, which I haven’t heard asked. Of course, we have the ECB, we have the euro system and we have the European System of Central Banks. And the Bank of England is a member of the European System of Central Banks. And much of the treaty, when it talks about monetary policy, actually refers to the European System of Central Banks because, of course, the euro is the currency of the European Union.

Are there any implications whatsoever of the Bank of England leading the European System of Central Banks for the system for monetary policy? You’ll obviously lose some colleagues. But is there anything that we don’t sort of know about that is going on at that level that, you know, from the central bankers’ point of view is a little bit of a—bit of a loss?

VILLEROY DE GALHAU: Let me first say that—it’s a personal comment—but I think we will all share it. The timetable agreed yesterday evening in Brussels is good news because it gives us collectively six months more to avoid the worst solution, which is a no-deal Brexit. And this clearly is the will of the majority of British people and British MPs. It’s good news. It’s not yet the solution because it’s now up to our British friends to decide within the six months which kind of deal they want to avoid a no-deal Brexit. But it’s good news.

To answer to your specific question—and, Paul, if I may congratulate you, because not many people are aware of the situation you described. We have subscribed capital of the ECB with twenty-eight central bank orders, and not the ninety members of the eurozone. So if I look at the subscribed capital, Bank of England is a significant shareholder, with around 40 percent of ECB subscribed—sorry, theoretical capital, if you like. Subscribed capital, I guess is the right word. But it’s on paper, so to say.

If I look at the paid-up capital, there is a very significant difference between the eurozone members and the EU non-euro members. So paid-up capital detained by the Bank of England is much, much smaller—zero-point-something. So its participation in the benefits and the possible losses in the ECB is much, much more too. So if they leave, we will have a new partition of the subscribed capital and of the paid-up capital. But as you see, on the real capital it’s not a huge story.

From an institutional point of view, we have a governing council which gathers each second week. And we have a not very well-known body, which is the so-called general council, which meets each quarter with the twenty-eight. And my colleague—I was about to say my British colleague, but as you know he is Canadian, Mark Carney—(laughter)—comes very regularly to the general council. We did appreciate it. So, unfortunately, the Bank of England will leave the general council. Will leave also some technical committees they are a part of. In such a wide formation it will not make a huge difference for our technical decision, because most technical decision, as you can imagine, are taken within the nineteen.

And fortunately, we will have other bodies and other opportunities to meet. To mention only two, the Washington meetings and the Basel meetings we have each second month between central bank governors. But it’s very important that we cooperate together. We did it, which is not very well-known. We did it in the most recent period. There was a technical workshop between ECB and Bank of England to prevent all the technical accidents we could have had in Brexit. We did excellent work together. And it’s our intention to go on.

SHEARD: Very good. Thank you.

So, Eric, your question.

Q: Great. Thank you. Eric Stein from Eaton Vance.

Question: You got into this a little bit on the negative implications of negative rates. Can you give us any more thoughts—whether it’s on tiering of bank deposits, which has been discussed, or also, you know, your thoughts on the yield curve. Does the yield curve matter for banks in particular, not just as a signal? Is there things you could do to potentially steepen the curve and help the banking transmission mechanism, from a monetary policy perspective?

VILLEROY DE GALHAU: I’m sorry, I will disappoint you somewhat. But it will not be a huge surprise for you. I will not add anything to what Mario Draghi said yesterday. We had a consensus yesterday to—within the framework of our regular assessment to analyze the effects of negative interest rates on bank accommodation. We all believe that the overall effect of negative interest rates is positive, but we will assess if there are any side effects and, if so, if mitigation measures are needed. But let us work and then decide. I think it’s a good method. But I cannot give you the result before working on it.

SHEARD: Thank you very much.

Sorry, I can’t quite see the name. David?

Q: David Bard. The Halifax Group and the University of Pennsylvania.

It’s a little bit outside your wheelhouse, but I just wanted to get your perspective on what’s going on with terrorists around the world, not least of which is yesterday’s back and forth with your continent and ours, and how you think about the specific leaders in involved, and how that might play out?

VILLEROY DE GALHAU: You could presage a bit your question about specific leaders? (Laughter.)

Q: There are some—there may be a cast of characters involved. And sometimes personalities drive outcomes more than policy intends. And the extent to which you think idiosyncrasies of people involved might affect the outcome, I’d love to hear that.

VILLEROY DE GALHAU: If you allow me, I am a modest central banker. I’m not in charge of trade negotiations or of psychology of political leaders, fortunately so. They are democratically elected, so I will not make any comment there. But about your general question, obviously trade uncertainties played a major role in the slowdown we spoke about—a major role. And let me insist a bit on that, because there is sometimes a view that when you don’t have the increase in tariffs you don’t have negative effects. So you can negotiate, you can speak, and for years, without having negative effects on growth, provided you don’t increase the tariffs. This would be wrong.

The negative uncertainty induced by trade tensions starts with the uncertainty itself. And one very striking example is Brexit. You have no tariffs between—till today—zero tariff between the British economy and the EU twenty-seven. And despite that, we all know that there has been a significant slowdown effect on the British economy, due to this uncertainty, especially on business investment. So probably the main channel—the first channel in time of trade tensions to the slowdown goes through business confidence, and then diminution of business investment, and then slower growth.

You could see a second channel, which is risk premium on financial markets. But this first channel, through business confidence and business investment, is probably the most powerful one. And the level, it has been documented. So our interested figures, as a matter of facts, in the last World Economic Outlook, published by the IMF this week, that the level of business investment in the U.K. is significantly lower than what it would have been without this Brexit fiasco. We have—(inaudible)—the same effect at world level. And if you look at the evolution of world trade I mentioned, the diminution in manufacturing is especially impressive, and the diminution in capital goods is especially impressive. It’s the same investment effect.

So we should look at it a bit more closely, but what I just said about this main negative effect is also probably the main positive solution. It’s up to political leaders to lift now this geopolitical uncertainties introduced by trade tensions. So we would all welcome trade solutions. I mentioned Brexit. To give another example closer to here in Washington, which is the level of investment in Canada. It suffered, we saw it in the last two years, from the uncertainty about NAFTA, which fortunately seems to have been resolved.

But this is an important message. There are some economic policy measures to be taken—and, again, you mentioned fiscal policies, structural reforms. We will come back to it. But the main—the first answer is to lift this geopolitical uncertainty due to trade tensions. And this is clearly up to political leaders.

SHEARD: Mohammed.

VILLEROY DE GALHAU: Whatever the specificities are.

Q: Mohammed Khaishgi from The Resource Group.

My question, I guess, relates to something that I understand would be squarely within your wheelhouse, which is about the CFA franc, the currency of about twenty countries in West and Central Africa. There’s been a debate recently about the relevance of keeping the peg between the CFA franc and the euro, which of course is related to the previous—back to the French franc. The two sides to the debate being that, on the one hand—on the one hand there’s a substantial amount of reserves that these West African countries, and Central African countries, maintain with the Bank of France in exchange for the guarantee of convertibility. On the other hand, the rigidities it imposes upon those countries. I just wanted to know if you had any comments given the current debate that’s going on.

VILLEROY DE GALHAU: First, I congratulate you for your very precise knowledge of the so-called franc zone. And I guess not everybody around the table is completely aware. It’s a completely free agreement with fifteen African countries in Western and Central Africa, which they choose—and I stress, it’s their choice—to have a full convertibility of their currency, with some rules, including the centralization of part of the exchange reserve, let me stress, it could evolve. But the rule of the game is to have to them a regime of fixed exchange rate versus the euro, and full convertibility. And it works. If you look at the results, the average growth of franc zone countries compared to PS country within Africa is higher, and the inflation rate is lower. So it works.

But let me stress that it’s a completely free political choice. We have twice a year—twice a year the franc zone meeting at ministers level. The last one was in Niger two—last week. And African ministers confirmed very clearly that they want to stick to his agreement, for excellent economic reasons I mentioned. So I’m aware there are political polemics. Sometimes it belongs to democracy in these countries. Some of them came from European countries, I will not mention any of them, which is a bit more surprising. Let me only say that. But as long as—France has no specific interest in the franc zone. But we are committed to maintain it, as long as it is the African interest and choice.

SHEARD: Thank you very much. Marsha.

Q: Thank you. I have a question about—

SHEARD: Sorry, if you could just identify yourself.

Q: Sorry. Marsha Echols from Howard University School of Law.

On your side eight, on the right side, with your three green boxes. One of them is about SMEs, which are considered a strong point in the United States, and perhaps not as strong in France or in Europe as in the United States. I wondered what the role of your bank, the Bank of France, and also the European Bank, will have in this scaling up of SMEs, and what that really means.

VILLEROY DE GALHAU: First, let me—let me perhaps precise something I said. I don’t think that SME are underdeveloped in France, or in Europe, compared to the U.S. If you look, it’s a demography of non-financial companies, which is always an interesting story. The number of SMEs in Europe is brilliant. It’s true in Italy. It’s true in Germany. It’s true in France. It’s also interesting to see, there are differences, looking at the number of large corporations. It’s much smaller in Italy, it’s higher in Germany, and in France. And as we all know, one of the strength of the German economy is what they call mittelstand, so mid-sized companies. But I could be very wrong on corporate demography, which is apparently focus for you, but also for me.

But the difference I guess is not the size of the companies. The difference, it’s a financial structure. Be they small, medium-sized, or large, the level of equity in their balance sheet and compared to GDP is smaller in Europe. And this is not a French specificity. It’s true throughout the European economy as a whole. If you should try to explain that, there are probably two reasons. The first one is the companies themselves, because to increase your capital it’s a very strategic decision when you are an entrepreneur. So I don’t have to comment. I cannot do much thing about that. If you have a sound financial system, entrepreneurs have more contacts with diverse funding structure, including long-term funds, et cetera. But it’s their decision.

The second part of the story, which refers to the left part of the slide, is more interesting. What is the structure of savings? And here, you see a significant difference between the U.S. and Europe. The part of financial savings, of American savers, which is invested in, let’s say, equity products or more risky products is much higher than Europe. And European savers have a preference for liquid and safer assets. So, here we can probably act in two ways. First, trying to force the longer-term product. If you take the example of life insurance, which is very developed in France and in other European countries, it should be longer and somewhat equity-oriented. And there are new products from that.

And second, and this is the middle part of the slide, if you have rather liquid savings or safe savings, and equity needs on the right side, you to rely on the efficient and more developed financial system. This is precisely what the financial industry is for, is to transform safe savings into longer-term and risker investment. This is why we need to develop capital markets union. Savings in some type—is sometimes in countries, and the investment needs are in others. So cross-border bank consolidation, as I strongly stress, and also capital markets union. And if you look at the degree of security and the time horizon, saving is shorter. And it’s up to the financial system to absorb the risk of financial transformation.

We all agree about that. But we should be aware that public opinion is not completely aware of the economic purpose of the financial ministry. It’s sometimes a very passionate debate after the financial crisis to say that he financial industry is bad, failed, et cetera. We need a powerful financial industry in order to channel rather safe savings towards riskier assets, in the spirit of your question. Did I answer your question? And this is part of our responsibility. The first part, to change a bit the mind of entrepreneurs and to explain to them: If you want to develop your company, if you want to invest, if you want to innovate, you need to have more equity and with less debt. It’s up to them.

SHEARD: Thank you very much. Heather.

Q: Thank you. Heather Kiriakou from Northrop Grumman.

I wanted to ask a question a little bit more on trade, and also following up on the previous question on SMEs. So lost in the narrative on trade often is services. In the WTO framework, services are as important as manufactured goods. And when you look at the trajectory in Western economies, especially services are more and more important. So as we have debates within our own countries and across trade frameworks about trade policy and its importance to GDP growth, I just wondered if you could comment from a eurozone perspective where you see SMEs and services and policies going with trade.

VILLEROY DE GALHAU: Probably I couldn’t agree more with your question. The most efficient way to develop growth at global level and to promote trade is to extend the domain of international agreements, especially to services. And it’s a bit old style, as it has focused a bit too much on manufacturing and industry. And second, I believe, and probably most of us around this table do believe, that international agreements, multilateral agreements, are more efficient than bilateral deals. So let us focus on the extension of services. And let us focus to multilateral agreement. And what we could found the refoundation or renovation of WTO. Unfortunately, and this was maybe your question, I can only note that this is not the priority of some powerful political leaders around the table. Can I stop here?

Q: Yeah. (Laughter.)

SHEARD: You can, on that diplomatic note.

VILLEROY DE GALHAU: And perhaps to add your point about SMEs, it’s very important that we find ways—and it’s not only due to multilateral agreements. It’s also due to cooperation between large corporates and SMEs. But to involve SMEs into this international game. If we give the impression that international trade is only for large corporates, and even some very powerful companies which take the vast majority of the benefits of international trade, we will have an economic and political problem.

SHEARD: Thank you. Usman.

VILLEROY DE GALHAU: It’s also the issue—sorry, to—it’s also the issue of failed taxation, obviously. It’s part of this international rules we need. And you know it’s a strong priority not only of France, but the OECD at present.

Q: Usman Ahmed with PayPal.

If your previous speeches you’ve highlighted the importance of cybersecurity as the financial sector digitalizes—or becomes digitized. And you’ve highlighted the importance of international cooperation on that. So we know President Macron has kind of, you know, put up his initiative for international cooperation around that issue. I’m curious, from your perspective, what you’ve seen in the financial sector that’s been interesting, or exciting, or on the horizon for how we can do more international cooperation around cybersecurity, and if the private sector can play a role in that.

VILLEROY DE GALHAU: This is also a very important question. And I could be very long on that but let me try to put the answer in a nutshell. Of course, cybersecurity is a growing priority. We all agree on that. It will be a priority of the French G-7 presidency, which we have this year. Second, there is a more powerful move, which is a welcome move, which I mentioned earlier, of digitalization of financial services with the incumbents, but which new entrants, fintechs, and also very powerful new players, like your company, obviously. And this will bring us probably to new questions.

There is the classical answer, which is part of the right answer, to say: Same activity, same financial regulation. So whatever your origin is, you are fintech, you are big tech, you are financial instrument, you will have to implement the same financial regulation. Fine enough. We will do it. Have no doubt about that. But it’s only a part of the answer. And I would add a second layer, because the digitalization brings probably new questions to the financial industry. Can I mention three of them? First is cybersecurity, which you mentioned, which is a new issue. Second is data protection, because we all know that especially in payment services we are in data collection is probably the main value, more than fees. And third is, in some issues, competition and antitrust, because we know that for some players the winners takes most, or the winners takes all because of the network effects.

And in these three fields I just mentioned, international cooperation is less developed than for classical financial regulation. So the industry will have to adapt and providing new services with all its benefits to SMEs and household. But the regulators will also have to adapt and increase their international cooperation these three fields—cybersecurity, data protection, and antitrust. As a matter of fact, we organized in the framework of our G-7 presidency a conference on competition and financial services last Monday in the Bank of France. So we are precisely in this issue. But this is a start of a very important role.

SHEARD: Thank you very much. We’re really having a battle of the clock at this point, so what I’m going to do is just take the questions together. So Carol and then Michael, if you could just ask your question very quickly, and then see if we can bundle into one answer. And, John, I think you’ve taken yours down, OK.

Q: Sure. Carol Anderson with AT&T.

Following up on, I think, Heather’s question and the comment that was made about digital taxation, I know France recently enacted a digital services tax of about 3 percent on companies with global revenues of—in excess of something, like, $85 million, retroactive to January. Poland is looking at doing something similar. Austria is now looking at doing something similar. In parallel, the OECD taskforce is looking to make recommendations to the G-20. So I wanted to ask you about your thoughts on these fragmented approaches to addressing perceived digital taxation issues, and how that fits in with the OECD process, and your support of the OECD process, for sort of a universal and consistent recommendation on digital services taxes.

SHEARD: And, Michael, if you could just ask your question, quickly.

Q: Michael Mosettig, PBS Online NewsHour.

How—the European political leaders are making a big fuss in the last couple weeks about their evolving relationship with China. To what extent are the central bank relationships with the Bank of China evolving, particularly in view of the fact that they don’t have the kind of independence from political authorities that other central banks do, that you’ve empathized in your discussions.

SHEARD: Two quite different questions.

VILLEROY DE GALHAU: About the first question, I am fortunate enough not to be in charge in taxation, which is—(laughs)—which is always a very passionate debate. So I should have refrained of mentioning fair taxation in answer to your neighbor’s question. But let me only say, as an observer, that I’m not sure there is a contradiction or fragmentation, as you said. Some countries, including U.K., introduced domestic taxation. But in the case of France, at least, and probably for the others, they said very clearly that they would suppress this domestic taxation as soon as an OECD agreement is decided and implemented. And we all wish that an OECD solution—including the U.S., if I understand correctly—that an OECD agreement can come quite quickly. It was the case before the international taxation of corporates, with this BABs agreement you are aware of, which was a decisive progress. So I strongly hope it can come, and it will be the definitive solution, or the first-best solution, instead of this temporary domestic taxation implemented. But, again, I’m not in charge.

About your second question, it’s a quite sophisticated one. OK, can I say it this way, because you mentioned the political relation with China, the technical relation with the central bank, and independence was in. So I will have to think a bit on that, to elaborate. No, first to say that we have excellent relations with the People’s Bank of China and my colleague Yi Gang. To give you only an example, but an important and not very well-known one, we took the initiative at the Bank of France, one and a half year ago, to create what we call NGFS. NGFS is Network for Greening the Financial System. At the start, we were eight central banks and supervisors. We are now thirty-four. So coalition of the willing, but a very enthusiastic one. To address the kind of recommendations supervisors and regulators could make to the financial industry in order to better prevent a climate risk. And climate risk is part of the financial long-term risk.

The People’s Bank of China was among the founding members of this network, which is a decided success. Yi Gang participates in our Basel meetings, which I mentioned earlier. And we have really an excellent discussion. Looking at the kind of financial policy China is implementing, obviously they had strong development of private debt in the recent years. One of the objective is to stabilize this level of leverage and, if possible, to improve its ability to have less shadow banking and more banking channel. They are on the way on that. And there is a delicate balance between stability growth, which is one of the priorities of the Chinese authorities and addressing financial stability objectives. Looking at the independence part of the question, probably I will stop here, because I’m not—you are probably a better specialist of the Chinese internal relation. As you are, I can only tell that when we speak and when we work with the Chinese central bank, we speak with competent and fairly decisive colleagues.

SHEARD: Excellent. Well, that’s a very good note to end on. And I’d like to thank you, Villeroy, for a very comprehensive, informative, engaging conversation. And congratulations on all the work that you do. And best wishes for the future.


SHEARD: Thanks, everyone. (Applause.)


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