Banque de France’s François Villeroy de Galhau on the euro during his tenure

Thank you very much, Jenna, for your kind words. Thank you to the Atlantic Council for welcoming me again one year after you reminded us of what I said one year ago that bad news for the US are bad news or bad news for Europe are bad news for the other side of the Atlantic as well. Today I will express it more positively perhaps but the challenge remains the same: why the transatlantic partnership is still of mutual interest. And if I had been here some years ago, I would have stated the obvious. But really today, it's worth to explain why I have this deep conviction. Back in April last year, we already found ourselves in an exceptionally uncertain environment. One year on and with this new conflict in Iran, two observations stand out for me. First, the economy has held up better than expected, including in Europe. But second, despite these tensions, we need each other and we need predictability. And I will try to explain what I mean with predictability. But let me explain why the economy and trade have held up better than expected. Because despite rising trade barriers, you mentioned them, policy uncertainty, and geopolitical tensions, the world economy proved more resilient than feared one year ago. Global growth reached 3.4% last year compared to a 2.8% forecast by the IMF in April 25. The EU itself experienced a positive growth of 1.5% with an inflation of 2.1% as an average last year. This constitute a good starting position for 26. On this side of the Atlantic, the sharp slowdown in US growth that was feared a year ago. Remember, some analysts were even hinting at a recession has fortunately not materialized. Why so? And it's worth taking a bit time to try to understand. US growth has been driven by the AI investment boom, notably in data centers and technology equipment, but also on the demand side by a sizable wealth effect from dynamic equity markets and still supportive fiscal policy. This has supported domestic consumption but unevenly. You are aware of these figures calculated by the Dallas Fed. The top 20% richest households in terms of income make close to 60% of aggregate consumption. The so-called K-shaped economy. Surprisingly, although the 25 tariffs pushed the average US import tariff close to 17%, a record high, up 13 percentage points since January last year. The trade impact also proved less severe than initially feared. World trade volumes in goods and services rose by 5.1% last year. This resilience was supported by frontloading ahead of tariffs, by the expansion of AI related trade and by sustained consumer demand. European trade also proved resilient. Imports of EU goods still increased by more than 1% last year while export declined by only 0.5%. But this good news and good news there are should not hide the essential point. The counterfactual without tariffs would have been better. And this is my first slide. According to the last IMF's WEO published yesterday, US trade policy reduced global GDP growth by roughly 0.6 GDP points last year. If we count the direct tariffs effect first column, but also the rise of uncertainty second column and both uncertainty and tariffs come at a cost starting with the US economy itself. US tariffs were borne primarily by the US economy. A 10% increase in tariffs translated into roughly a 9.10% so 95% of the effect was a rise in US import prices with American firms and then American consumers already bearing around one-third of the burden. The outlook to stay with the economic landscape. The outlook remains deeply uncertain. Our environment has an extraordinary level of uncertainty and there are various measures. You see it on this slide. The ongoing conflict in the Middle East adds upwards pressure on inflation and downward pressure on growth worldwide. In the same IMF WEO, the reference forecast for global GDP growth was revised downward by 0.2% to 3.1% for global growth this year. And global inflation was revised upward by 0.6 percentage point to 4.4% as a whole this year. We know however that the exact scenario remains highly dependent on the magnitude and the duration of the conflict and thus of the lasting success of the announced ceasefire. This is also true on the European side. Our ECB macroeconomic projections published last month explicitly rely on three alternative scenarios ranging from baseline to severe and all point to the same conclusion. Lower growth and higher inflation. But let me stress one important and positive nuance. Today's macroeconomic environment is very different from that of 2022. The EU is no longer facing the post-pandemic imbalances we were facing then. Inflation has fallen sharply. Supply bottlenecks have disappeared and monetary policy is no longer constrained by the unconventional commitments made at that time. And this brings me to my second observation. The lesson of the past year is that we need each other and we need predictability. And let me here speak candidly as friends must speak especially when there are tensions. We need each other because the world we face is one of common shocks and common risks. Whether we like it or not, global shocks hitting interdependent economies indeed call for well-coordinated policy responses. This shock is common from the outset. Yes, the US is a net oil exporter and Europe a net importer, but there is one single global oil price. Gasoline prices and inflation expectation increase on both sides of the Atlantic and still more here and confidence effects and financial markets dynamics are global by nature. Second, US European allies sometimes get it right. They simply get it right when they say that energy transition is the best way out of the oil and Middle East dependency. Decarbonized energy power has expanded in Europe since 22 and this is good news. And wholesale electricity prices have decreased in Europe by about 70%. And more broadly, when Europeans stress that might alone might without right can be misleading, it's sometimes worth listening to them. Third, we need each other because due to trade and financial integration, a couple of structural issues binds our economic interest together. Global imbalances and financial stability. Let me stress with what we call global imbalances. They are widening after years of narrowing. Last year, as a percentage of global GDP, the US current account deficit reached minus 0.9%. While China's surplus rose to plus 0.6% of global GDP. These figures point to domestic challenges that no self-centered expedient, name it protectionism, can address. And these domestic challenges need to be addressed together. Too little consumption in China, too much fiscal deficit in the US, and too little productive investment in Europe. This also applies to our dependencies on critical raw materials, including rare earths. Economic security requires coordination rather than fragmentation. Let me add some words about the other common issue we have which is financial stability. The rapid growth of private credit, sovereign debt, elevated AI related valuations and the rise of crypto assets are creating new fault lines in the financial system. Therefore, under its G7 presidency this year, France will contribute to addressing these common challenges in coordination with the US G20 presidency to the extent possible. Financial stability also includes combating financial crime through better enforced anti-money laundering standards but also fostering cross-border payments implementing Basel III. Can I say on that that having now a US proposal is welcome but it should not mean banking deregulation and also on our front an agenda better monitoring so-called NBFIs, non-bank financial intermediations. We need each other but we need predictability because interdependence alone does not create trust. Our economies now need predictability and this would be the most powerful engine for global growth on the US side. Beyond the best possible resolution of the Iran conflict, this predictability calls for a soft landing on trade and on the European side for an acceleration on growth and innovation. Let me elaborate briefly on these two sides. The recent US Supreme Court decision on the IPA tariffs reminds us that American checks and balances might well be alive. But by invalidating the 25 tariffs, it has also reopened legal uncertainty with possible substitution under other statutes, unsettled trade agreements, and uneven effects across trade partners, including Europe. How could it be, my friend, that the main relative winner of a new trade regime could be China? And the main relative losers could be US allies like the EU, the UK or Japan. We now need a soft landing on US trade with a return to a more predictable environment. Let me come to the European side. To build a more balanced transatlantic partnership, we also need a stronger Europe and a quicker one with the Letta and Draghi reports. We have a compelling blueprint and we have started implementing it. Let me this will be my last slide remind you of our three imperatives. Three I's. First, integrate more the single market. This is about size with notably the creation of an optional 28th regime by 2028. Second, invest better and this is financial muscle the savings and investment union aimed at fostering equity and innovation financing. And so we will deliver on three key priorities AI, energy transition and defense. And third, innovate faster and for that dare to simplify. We have started this journey but we must still accelerate our speed and beef up implementation. Let me conclude. This is a decisive moment for the transatlantic partnership. We should have no illusions. In a world of common shocks and common risks, Europe and America will either win together or fall together. I am fond of this old quotation by Benjamin Franklin as he warned 250 years ago at the signing of the Declaration of Independence. I quote, 'We must all hang together or most assuredly we shall hang separately.' His warning still resonates today. Our responsibilities remain shared. So must our resolve. Thank you for your attention.

Can I first answer with a smile, Charles, if I may? Among the G7 countries, France is probably the one which is closest to a current account balance. So we think this puts us in a good position to make progress. But that said, we don't pretend to solve all issues this year. Obviously, if we could already come to a shared diagnosis and second to a direction of travel, it would be a significant progress. I think there is a feeling around the table that in order to foster global growth we must adjust and solve part of these global imbalances. You were kind enough to quote a Banensky blog which explains why in history and not only today these global imbalances were detrimental for global growth and created financial risk. So they are not sustainable in the long run. Let me go a bit further. Not in this country, not in Europe, but in China. And probably it's also China's long-term interest to rebalance its growth to have a less export-driven model and more internal consumption model. I don't say it's obvious to achieve this shift but I think there is a growing awareness on the China's side that in order to have a sustainable growth it must be a different engine here. Obviously the debate about the fiscal deficit is a bit more difficult but again it would be common interest is not the idea to point to such or such countries and saying you are responsible for this global imbalances but frankly we know that protectionism is not the solution to this global imbalances. I stressed it last year here. The first and foremost effect of protectionism would be to have a slower growth everywhere including in this country. So it's a lose-lose solution. It's worth really to invest a bit more intellectually in a shared diagnosis and again a direction of travel to try to find a better solution and a more effective one to reduce global imbalances. So we created an economist group chaired by Hélène Rey, a prominent French and British economist. She teaches at LSE. She will be the next chief economist of the BIS as BIS chair. We just chose Hélène as the next BIS chief economist and there are three other economists an American one, Gopinath, a Chinese one, a German one, Axel Weber who was here just today in this building. Yes, I met him coming in. So, we created the best conditions and I think it's really worth to invest a bit.

No, believe me, the Europeans are listening to the US and the lessons of the US economy without any doubt. They even sometimes lack a bit of self-confidence in their own assets. But they are all looking at the US receipts for growth. When I said that in an alliance we should listen to each other I think some useful lessons for the Europeans they are not always wrong be on the geopolitical front or on the energy transition. That said we have to take lesson from the US in the other direction and a dialogue is not a black and white story we should listen to each other. I hope it's obvious for everybody in this room. I stress it because it's not obvious on the public stage at present. You have the impression that either you are 100% right or you are 100% wrong. This is not how real life works. What we have to learn from the US on the economic front is the importance of innovation, productivity and private investment. Can I elaborate a bit on that? And this is a story about the so-called savings and investment union. It's not the fact that Europe lacks private savings. It's exactly the contrary. The level of private savings in Europe is higher than in the US. It's about 15% of disposable income of households while it is about 10% in the US. But this savings is not allocated rightly and it's not enough invested in equity and venture capital. If you look at corporate equity, you probably know less about this figure. Corporate equity compared to GDP is about 80 to 90% in Europe while it is more than double 220% in the US. And if you have more equity, you are more innovative as a company because you are more ready to take risks. And if I turn to the other side, because we speak of savings and investment union, now I turn to investment. I will perhaps surprise you, Charles. But the level of investment as a whole compared to GDP is about the same on both sides of the Atlantic. But there is a significant difference in what we call productive investment. If I forget about real estate and some public infrastructures and here there is a difference of about 3% of GDP. So Europe has to accelerate on productive investment and there is a clear link between the financing sides what I said about equity and the investment side. We know what we have to do there. And we have also to as I said to integrate more the single market. The 28th regime will be a fantastic opportunity for European innovators and entrepreneurs because they can deploy the innovation at the European scale. So we should go quicker but the road is rather clear on that and we take US lessons obviously.

Charles, can I first thank you warmly to read all my speeches with such care. And you are right. I have a great team. No, no. And I will be consistent. We are on this journey. And so there is this famous image of the glass being half empty or half full. If you look at the degree of implementation of the Draghi report and measured by an independent institution the last figure is that about 40% of the Draghi recommendations have been either fully or partially implemented. I would like it to be higher but 40% is not zero and I mentioned the 28th regime we could mention several other examples of the savings and investment union we could mention simplification. Believe me, Europe is on its way. So the wake up call has been listened to. I would like still some accelerator. So the commission to be bolder and as I proposed as to have a global a general calendar referring I'm sorry this is a bit old European history but referring to Jacques Delors and the single market. You are too young for that, but I'm unfortunately older. When Jacques Delors arrived in Brussels, it was a so-called eurosclerosis and he accelerated with the single market project and with a clear deadline. Probably everybody forgot about what is exactly the content of the single market. But everybody remembers the calendar 1st of January 93. And there is another famous example 1st of January 99 for the single currency the euro itself and we delivered. So I would like Europeans to have a deadline I don't know if it's 28 or 1st of January 29 but during this US administration to build what I call economic and financial sovereignty after the monetary sovereignty which was a huge success with the euro.

Let me start with the technology. I'm a great believer in technological innovation and in particular in tokenization. I guess the audience is familiar with the word and Piero Cipollone explained it but the idea of tokenization is that thanks to blockchain you can put together payment and delivery and you have a single transaction which creates trust. It seems obvious but payment versus delivery has been a nightmare in payments for not only decades, centuries. So I really believe it will bring something. The technology does not change the philosophy of money and of payments. If you allow me one minute of philosophy if I look at the history of money, it has always been a public private partnership. You have a public anchor which is central bank currency at present bank notes and you have private solutions. Think of your credit cards etc. In the world of tokenization we will still need these two floors a public floor and this is what we call central bank digital currency and private solutions. About the public level we are we lie ahead as ECB on a tokenized CBDC in Euro on the wholesale side it will be the so-called Pontes project which probably Piero Cipollone explained by next summer we'll be the first central bank to offer such a CBDC and on the retail side what we call digital euro a bit later probably 28 or 29 but this has to be combined with private solutions stable coins for the wholesales probably in euro or tokenized deposits and for the broad public for retail what we call Wero or pan-European solutions there are international solutions but we cannot be in a situation where we are fully dependent of non-European solutions be it on the private and the public part so this is the sense of the strategy and I see with great interest the development of stable coins in this country and I think it's very innovative on technology. There is a question on the US side about the public anchor. I think it could be a missing link what I call the CBDC on wholesale. It could be a question for the dollar itself.

I think we have here we have a clear calendar on the European side. So it will be completed on the wholesale side I would say by 28 and on the retail side perhaps by 29.