A central banker’s lessons from a fragmented decade

With multilateralism in crisis, new ways must be found to co-operate, argues the departing head of the Banque de France, François Villeroy de Galhau

WHEN I BECAME governor of the Banque de France in 2015, a friend predicted plain sailing. The decade that followed was anything but. For us central bankers, deeply held convictions were tested. A bunch of stability lovers, we faced repeated shocks. Devout internationalists, we endured fragmentation and increasing recourse to unilateral might. These years could be viewed as purely chaotic and negative: slowing economic growth, rising debt and surging populism. Yet beyond this bleak picture, I draw four vital lessons.

First, monetary policy worked, albeit not exactly as expected. In 2020-21 central banks confronted the risk of deflation triggered by the covid-19 pandemic; and from 2022 onwards, an inflation surge amplified by Russia’s invasion of Ukraine. Perfection is not the benchmark, but progress has been tangible. Inflation was brought down without the recession many feared—a soft landing, by any definition.

But legitimate pride is different from hubris. Monetary policy in the wake of the global financial crisis of 2007-09 relied on an expanded arsenal of unconventional tools. Some proved remarkably effective: all balance-sheet instruments, including quantitative easing. Two other, more Promethean instruments appear less convincing today: long-dated forward guidance, which sought to forge the future, and negative interest rates, which strained economic common sense.

At the time, a refrain was repeated like an exorcism: monetary policy cannot be the only game in town. This statement recalled an obvious truth. But the lesson was soon forgotten. After its efficiency against the financial crisis, monetary policy came to be expected—not least by politicians—as a way to tackle inequality or anaemic long-term growth at little cost.

Today, central banks aim to be both humble and nimble: data-driven, deciding meeting by meeting; working with scenarios in the face of uncertainty; and focusing firmly on their core mandate, price stability. This does not, incidentally, conflict with attention to climate risks, as extreme weather events increasingly affect economic activity and inflation.

Second, independence is not a given, but is a prerequisite for effectiveness. The main challenge for central banks today—the growing threat to their independence—was barely thinkable a decade ago. Modern monetary policy works largely through expectations: households and firms must trust central banks’ commitment to bring inflation back to target. That credibility explains the relatively quick and low-cost disinflation of the early 2020s, compared with the long and painful battles of the 1970s. Attacking central-bank independence while claiming to fight inflation is schizophrenic.

More broadly, with today’s democratic governments often appearing slow or constrained, the central-bank or “agency” framework offers a governance blueprint. It rests on three legs: a clear and measurable mandate (such as the 2% inflation target); autonomy over the means to achieve it; and democratic accountability for results. It is of course for democratic processes—not independent authorities—to decide where such models work best. But in Europe this architecture could inspire governance in areas such as energy decarbonisation or artificial intelligence.

The third lesson is the importance of building “pragmatic plurilateralism”. Multilateralism is in critical condition. The G20 has suffered most, limping from one communiqué to the next since the pandemic; the G7 under the current French presidency has at least been able to keep America onboard. International financial institutions, not least the IMF, remain invaluable as truth-tellers. But the time has come to find new ways to co-operate. Pragmatic plurilateralism—selected countries working together on specific issues when interests converge—is the way forward.

It is plurilateral because realism now calls for coalitions of the willing. In his Davos speech in January, Mark Carney, Canada’s prime minister, referred to an alliance of “middle powers”—an unnecessarily derogatory label, perhaps, but a sound idea. The success of the Network for Greening the Financial System illustrates the point: this best-practice-sharing and finance-mobilising group of central bankers and supervisors was launched from the Banque de France in 2017 with just eight members; it is now 152 strong. Such coalitions work best with light but permanent secretariats.

It is pragmatic because it focuses less on grand macroeconomic ambitions and more on specific, shared public goods. Take financial stability: notwithstanding the current American temptation to deregulate or “de-supervise”, we should never forget financial crises and their huge economic costs. Common rules for banks (Basel III), and even more so for non-banks, are in the common interest. Other topics ripe for such pragmatism could include trade, climate, payments, tokenisation—and not least AI.

The final lesson is that Europe’s solidity depends more than ever on speed and delivery. Since 2015–16 I have witnessed three reinforcements of Europe. Citizens’ attachment to the EU has strengthened despite Brexit—and arguably because of it. The euro has consolidated spectacularly: Greece has more than overcome the crisis of 2015 and support for the single currency in countries that use it stands at a record 82%. Last, Europe has also emerged from the banking crises that weakened it until 2017. The EU’s banking union remains far from perfect, but the less formal supervisory union has proven to be effective.

Europe is robust, but not agile enough. It needs to wake up on innovation and productivity. About 40% of the Draghi report’s recommendations have been fully or partially implemented, according to the European Policy Innovation Council, a think-tank—more than many imagine. But we need to speed up and change both mindset and governance. Mindset means reconciling the two leading European economists of the 20th century: John Maynard Keynes’s social model and Joseph Schumpeter’s creative destruction. This is not an oxymoron: Sweden, Denmark and the Netherlands are among the most innovative countries in Europe, while also having some of the lowest levels of inequality.

As for the continent’s governance, it is true that democratic deliberation takes time. But must it require three years between a European Commission proposal and a parliamentary vote on the digital euro? Must progress always wait for all 27 member states? The euro itself—adopted by 11 countries at launch, used by 21 today—shows how integration in steps, without waiting for all to be ready, can succeed when anchored in a strong institution such as the European Central Bank. Where appropriate, for instance with defence, such integration could also include Britain and other close partners.

Nearly 35 years after the advent of the single market, Europe needs a mobilising date “à la Delors”—mirroring the former Commission president’s “Objective 1992” single-market push—for economic and financial sovereignty. Why not January 1st 2029, 30 years after the birth of the euro? With such a target, it may yet turn the challenge of the “Trump years” into a golden opportunity.