Villeroy de Galhau calls for Franco-German bargain to boost economic recovery
France’s top central banker has pleaded with Germany to loosen its fiscal policy as part of a deal with his country to strengthen the eurozone.
François Villeroy de Galhau, governor of Banque de France, said Paris must press on with its own reforms as part of an accommodation with Berlin, with the two countries seizing the opportunity provided by synchronised election cycles and an economic recovery.
The appeal by Mr Villeroy de Galhau, a member of the European Central Bank’s governing council, shows the way monetary policymakers want to shift the burden of strengthening the eurozone to politicians, after years of nursing the region through its financial crisis with ultra-low interest rates.
“Everyone agrees that monetary policy cannot be the only game in town,” Mr Villeroy de Galhau said in an interview with the Financial Times at the BdF’s headquarters in Paris. “There has to be more reforms in France, and more stimulus in Germany in the interest of more solid economic growth.”
The Banque de France governor said Germany and France had “no alternative” but to strengthen ties and build a stronger economic alliance, following the election of pro-European Emmanuel Macron as French president and as ECB policymakers begin to think about winding down their monetary stimulus. Chancellor Angela Merkel is expected to win German elections in September.
“There has not been a time in the political cycle when there have been French and German elections in the same year for 15 years,” said Mr Villeroy de Galhau. “This gives us three years to optimise the economic union.”
The ECB is buying €60bn of mostly government bonds each month under its quantitative easing programme. Signs that it will taper its purchases in 2018 have spooked financial markets, triggering a wave of volatility.
Mr Villeroy de Galhau said he belonged to “the pragmatists on the governing council” of the ECB, suggesting his views on a tapering of QE were close to those of Mario Draghi, ECB president. The Frenchman is seen as a potential successor to Mr Draghi.
“I think we have adjusted the intensity of QE the right way so far. Clearly in the fall we will have to decide the next steps. I think the pragmatists will be the most important ones in shaping the decision,” Mr Villeroy de Galhau said.
“There can be questions asked about the pace of progress, but there is no doubt about the direction. We will adapt monetary policy to improvements in inflation and the recovery. And we are willing to be patient and active for as long as we need to be.
”Mr Villeroy de Galhau, who took up the governorship after a spell at French bank BNP Paribas, backed the ECB governing council’s present message that rates would remain unchanged at their current historical lows at least until the end of QE. The ECB’s main refinancing rate is zero and it imposes a negative rate of minus 0.4 per cent on deposits parked by lenders at the ECB, much to the chagrin of Europe’s banks.
“I have always been clear about negative rates; they are useful, but they have limits,” he said.
The governor said the shift towards the centre ground by broad numbers of the electorate in places such as France and the Netherlands had revived economic officials’ spirits. “The European mood among economic officials has changed very dramatically over the past 12 months,” he said. “This year, 2017, was supposed to be the year when everything went wrong. But it has been the opposite.”
On economic reform, he wants to see a deal where countries such as France and Italy make adjustments in exchange for looser fiscal policy and stronger wage growth in Germany and the Netherlands. He has also called for a “financing union” to fund pan-European investment.
Chief among the reasons for that optimism has been Mr Macron’s victory not only in the presidential elections, but also the success of his party in taking the majority of seats in the French parliament. That has led to hopes that France will deal with its unemployment problem by passing labour market reforms and bring its budget deficit into line with European targets that stipulate it must fall within 3 per cent of a country’s gross domestic product.
Mr Villeroy de Galhau said keeping the deficit within the rules as soon as this year was “an important condition for France to restore its credibility” in Europe. “It is feasible,” he said. France’s state auditor has warned the deficit would hit 3.2 per cent in 2017 unless the government found about €5bn in additional savings.
Mr Villeroy de Galhau, a former chief of staff to then finance minister Dominique Strauss-Kahn, refused to be drawn on whether he would put his name forward for the position of the next governor of the ECB after being touted in the German press as a potential rival to Jens Weidmann, Bundesbank president, in the race to succeed Mr Draghi who leaves the ECB in 2019.
“I’m a very happy governor of the Banque de France with a mandate till 2021. It’s not a subject for discussion,” he said.
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