Hearing of François Villeroy de Galhau, Governor of the Banque de France, Before the Finance Committee of the French National Assembly

Mr President, Mr Rapporteur General, Ladies and Gentlemen,

I would like to thank you for welcoming me to this hearing – the Banque de France has a duty of accountability to the nation's elected representatives in the service of our fellow citizens. I will begin with the current economic situation, which is in a transitional phase: we are gradually emerging from the inflationary crisis and we are set to reverse the interest rate cycle (I). However, as the inflationary tide recedes, underlying structural challenges reappear. In this regard, I will talk about the public and private financing needed by the French economy (II). 

I. Victory over inflation is in sight, and this will boost activity

The first piece of good news is that the victory over inflation is in sight: inflation in France has come down from its peak of 7.3% in February 2023, to 2.4% in April 2024, according to the European harmonised index. While this decline is due primarily to the 'exogenous' factors of lower energy and food prices linked to global commodity prices, the very real effects of monetary policy have also played a key role. In addition to the impact of the rise in key interest rates on the credit channel, better control over the expectations channel  has also played a very positive role. This is the big difference with the 1970s and the reason why long-lasting price-wage-margin spirals have been avoided. The credibility of central banks and the strength of their anti-inflationary 'signal' has rapidly “reanchored” price and wage-setting behaviour. ⁱ 

I hereby reiterate our forecast, and our commitment: there may be short-term bumps in inflation over the coming months, but we are going to bring inflation back down towards 2% by next year at the latest. We are closely monitoring oil prices, which could represent an upward risk, but these are not showing any significant movement and the price of Brent crude remains below $90 a barrel. We are also monitoring service prices – the key component of core inflation – which has traditionally come back down more slowly (from 4.3% in April 2023 to 3.3% last month). 

Now that we are confident of getting to our destination, we need to choose the interest rate path that will minimise the economic cost. So the time has come to decide upon the first rate cut, most likely at the beginning of June. I would then advocate pragmatic and agile gradualism: the pace of interest rate cuts will be decided at each meeting and be guided by the data and by European forecasts. I should stress that one of the advantages of having created the euro with a vast internal market is that we are now less dependent on American decisions. Fluctuations in the dollar account for less than 10% of European inflation. We will have significant room for manoeuvre before returning to an overly accommodative monetary policy, with recent Banque de France estimates putting the neutral or equilibrium rate at between 2% and 2.5% in nominal terms. 

The second piece of good news is that this disinflation will boost activity. We have avoided the much-feared recession, with growth of 0.9% in 2023, and 0.2% in first quarter 2024 - as predicted by the Banque de France. Our monthly business survey published this morning confirms good resilience in April, especially in services, with more uncertainty in May because of the number of bank holidays. Wages are now growing faster than prices (year-on-year growth in the monthly base wage of 3.3% in Q1 2024; annual growth in average per capita wage of 3.2% in 2024, according to our March projections). This means that purchasing power, and therefore consumption, is set to be the main driver of growth again - whereas it was foreign trade in 2023. For 2024 as a whole, the growth carry-over is already 0.5% after the first quarter; forecasts range from 1% for the French government, and 0.8% for the Banque de France in March (we will update our forecast in mid-June), to 0.7% for certain international organisations. At this stage of the year, these differences are within the legitimate margin of uncertainty. I also detect hints of a 'recovery' in certain European indicators; the Banque de France's observation for this year remains one of resilience. However, a more robust recovery is expected in 2025 and 2026, with lower interest rates providing stronger support for investment. 

II. Covering the financing needs of the French and European economies

As we emerge from the inflationary emergency, we need to come up with a longer-term ambition to 'beef up' French and European growth. Among the structural weaknesses, we have made considerable progress over the last ten years in employment. The employment rate has risen from 64.7% to 68.4% between 2015 and 2023; at the same time, the unemployment rate, although temporarily rising to 7.8%, is well below its 2013 peak of 10.3%. In addition, more than 50,000 private sector jobs were created in the first quarter. This encouraging progress is yet another reason to collectively stay the course towards full employment, which is within reach this decade.

However, we have made little progress on public finances, and we are faced with huge investment needs for the ecological and digital transitions.

1. Consolidating the public finances

France's public debt and deficits are obviously much too high. The renewed Stability Pact came into force at the end of April. Despite its limits in terms of complexity, the key challenge now is to deploy it as an effective lever for reducing our public debt, which currently stands at 111% of GDP, 20 GDP points higher than in the euro area as a whole.

What are the avenues now available for consolidating French public finances?ⁱⁱ Obviously, it is a matter for democratic debate to choose between the various savings and revenue measures required. And we all know there is no simple, all-embracing solution. This is a longstanding problem, which is not attributable to a single government. And it is a collective problem, which is not the concern of a the State – and still less of one single consolidation measure. Nevertheless, the Banque de France has a duty to make its independent overall economic analysis available for the purpose of this debate. The expected economic recovery and monetary easing are conducive to fiscal consolidation. The first thing we need to do is to take action on spending: accelerating growth and employment alone will not be enough. The root cause of the "French malaise" is the continuing increase in public expenditure. I am a fervent defender of the European social model – with strong public services and fiscal and social redistribution – but there is no escaping the fact that in France it 'costs' us almost 10 GDP points more than our European neighbours. This difference is not simply bad news: it is an invitation to compare and to act, by drawing inspiration from the most effective public solutions in Europe. This assumes an effort in terms of priorities and efficiency that is fair and shared by everyone – not just the State, but local authorities and social services as well. As a complement to this, targeted fiscal measures cannot be ruled out. These could involve broadening the tax base, especially for certain "niches" which would also ensure greater fairness. 

2. Ensuring the smooth bank financing of households and businesses

Lending to households – in the form of home loans for the vast majority – is obviously sensitive to the interest rate cycle: after the exceptionally high levels of 2021 and early 2022, new housing loan production stood at only €6.7 billion in March. ⁱⁱⁱ This can now be attributed essentially to demand from households that have adopted a wait-and-see attitude. However, a number of leading indicators point to encouraging trends, and conditions now seem conducive to a gradual recovery: property prices have fallen and lending rates are stabilising or even falling. Banks, for their part, are once again in supply mode and able to meet the demand for credit.

For businesses, amidst stabilising borrowing costs for them too, access to credit remains well-ensured overall, with year-on-year growth in outstanding loans of 1.5% to March, ^iv –1% for SMEs – buoyed in particular by good momentum in investment loans (up 3.7%).

3. Mobilising private savings in Europe to finance the ecological and digital transitions

In France and in Europe, we need to free up other sources of finance to cover the substantial investment needed to address the climate as well as spending on potential growth drivers such as digital innovation. The climate transition alone will require between €500 billion and €600 EUR billion in additional annual net investment in Europe between now and 2030. But we have a little-known resource: the net private savings surplus, i.e. over €300 billion a year that is invested outside Europe, particularly in the United States. To unleash this full financial potential, progress needs to be made on the Capital Markets Union project: firstly, by restoring its purpose, and renaming the project the "Savings and Investment Union", as suggested by Enrico Letta^v; and secondly, by focusing our efforts around a few selected levers, of which I will now provide two examples^vi to back up the Noyer Report. ^vii

The first is the development of equity financing, which is crucial for innovation. Europe lags far behind the United States: equity financing accounts for a mere 84% of GDP in the euro area, compared with 173% in the United States. This funding could be boosted by an ambitious public-private partnership, with the possibility of public backing for pan-European venture capital funds. 

The second possible lever is green securitisation, provided it is sufficiently secure. At the end of 2023, European regulations paved the way for using the European Green Bonds label (EuGB) for green securitisation, provided that the funds raised on bank balance sheets - for example by securitising housing loans - are allocated to European Taxonomy-aligned sustainable activities. This could boost banks' capacity to finance green projects by several hundred billion euros a year.

***

The examples I have just presented illustrate one conviction: the decline of Europe is by no means inevitable. Our continent was able to join forces to make a success of the euro. In a tougher, more fragmented world, Europe must combine three shared levers: size - the single market - multiplied by financial firepower - the Savings and Investment Union - multiplied by enhanced public efficiency. It will then be able to overcome its current doubts and reassert its social and environmental model in the long term. Thank you for your attention.

ⁱ François Villeroy de Galhau, “Anatomy of a fall in inflation: from a successful first phase to the conditions for a controlled landing", Speech at the University of Paris-Dauphine, March 2024.
ⁱⁱ "France and Europe: from crisis management to a longer-term ambition“, Letter to the President of the French Republic, April 2024.​​​​​​​
ⁱⁱⁱ Banque de France, Loans to individuals, March 2024.
^iv Banque de France, Financing of Enterprises, March 2024.
^v Enrico Letta, Much more than a market, April 2024.
^vi François Villeroy de Galhau, From a Capital Markets Union to a genuine Financing Union for Transition, Speech given at Eurofi, Ghent, February 2024.
^vii Noyer Report: developing European capital markets to finance the future, (French only) April 2024.