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Le Monde: "From today’s emergency to initial thinking about tomorrow"

From today’s emergency to initial thinking about tomorrow

Clearly, we are experiencing an unprecedented and totally unforseeable crisis. Thanks in particular to the Banque de France's detailed survey published this morning, we now have a clear picture of the effects of confinement: at end-March, the French economy was running at two-thirds of its normal pace. This means that every two weeks of confinement costs us around 1.5% of GDP in terms of annual production loss and over 1% of GDP in terms of additional government deficit. Our growth estimate for the first quarter thus stands at -6%.

How can we fight this economic battle, alongside the battle for public health, which is obviously the priority? The emergency has become apparent everywhere: to quickly and massively set up a shield to help businesses of all sizes get through this shock and then operate again, which also protects their employees. The lessons of 2008 have been learnt: this time, strong responses have been implemented in less than a month, and these have been the subject of a – rare – consensus among all economists. In France, these include short-time work – currently the most generous arrangement in Europe –, deferrals of taxes and social security contributions, the solidarity fund, and state-guaranteed loans for a total of EUR 300 billion.

At the same time, Europe is taking action, more than has been said. The debate on corona bonds divides us, but the exceptional monetary action taken by the ECB – which is much more significant – brings us together: up to EUR 3,000 billion in extra liquidity made available for businesses and SMEs that finance themselves through banks; an additional asset purchase envelope of EUR 750 billion for large companies and governments that finance themselves through the markets. Discussions on the European Solidarity Mechanism and other mechanisms are continuing, but our "Pandemic Emergency Purchase Programme" (PEPP) has been operational for two weeks. Let us therefore put this debate on European financial solidarity into perspective: Europe could certainly do more, but let us not forget that it is already doing a great deal.

On today's emergency, there can therefore be no hesitation nor limitation. All the more reason to start thinking about tomorrow, the post-crisis period. And there the questions are much more open: we know that growth will be strongly negative in 2020, then positive in 2021; but the figures will depend on the correct adjustment of an exit from confinement that promises to be very gradual in Europe and throughout the world. We know that debt will have increased significantly, both for Member States (from 10% to a several dozen GDP points) and for businesses, and that, symmetrically, many households will have saved significantly during the confinement period. However, we are not yet able to pinpoint the best post-crisis strategy.

We can, however, consider a mix of the three ingredients used in post-war periods, on which economic research is focusing with significant interest today because our post-crisis period will be somewhat similar, albeit less dramatic, fortunately: return to growth, debt treatment and the proper use of monetary policy. 

First, as regards supporting growth, household demand should be driven by their relatively favourable financial situation. The US government is writing out cheques to households in order to compensate for the major weaknesses of the US social model: no generalised health insurance and, above all, no short-time work, which has already led to ten million additional job losses in fifteen days. On the other hand, supply by certain businesses could remain constrained by their high levels of debt, or even bankruptcies or persistent international supply chain difficulties. There will therefore be a need for major investment programmes, which will support demand while improving production capacity. Largely financed at the European level, which still has a debt capacity, they will be able to return to our structural priorities such as climate change. At national level, the best investment for growth will continue to involve all the measures for education, vocational training and greater skilled work: fortunately, France had created one million additional jobs in the four years preceding the shock of the virus; tomorrow, the price of this shock should still be covered thanks to our wealth-producing work.

The way to deal with debts inherited from the crisis will necessarily require a determined fiscal effort with public spending that will finally be more selective. But this effort will only bear fruit in the medium term, since the economy will first need to be kick-started. Some, such as Mario Draghi, have even considered a partial transfer from private corporate debt to public debt, by transforming certain loans or deferred charges into subsidies or equity. In post-war periods, there have also been mechanisms for ring-fencing exceptional debt – which does not in itself solve the problem of the resources to be allocated to it – or for mutualising debt with the most robust countries; a "Marshall Plan for the coronavirus" would, however, require global or European solidarity, which is, alas, uncertain. There are partial solutions, but there is no miracle: we will have to bear higher public debts for longer, even though the burden will be lightened if interest rates remain very low.

This finally brings me to the proper use of monetary policy. Inflation is expected to remain weak over the period, with aggregate demand recovering only gradually and oil prices remaining low. The European Central Bank – and with it the Banque de France – will therefore have to for some time contend with inflation – currently only at 0.7% – which spontaneously remains too low compared to its definition of price stability, close to 2% over the medium term. This means that we will have the possibility, and even the obligation, to maintain very low interest rates and very abundant liquidity long into the future. Some go further, with much more speculative and complex theories to be implemented: for example, according to these theories, central banks could, lastingly create money to finance businesses directly. In principle, nothing is off-limits in an intellectual debate, but such hypotheses could only be considered if there was a major “downside” risk for price stability.  Two pillars must indeed continue to firmly anchor our action, even in these exceptional circumstances: the central bank’s mandate – ensuring price stability – and its independence. Because both of them are set down in our common Treaty, and above all because they are the foundation of our most precious asset: the confidence of European citizens in their currency.


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Opinion columnsFrançois VILLEROY DE GALHAU, Gouverneur de la Banque de France
Le Monde: "From today’s emergency to initial thinking about tomorrow"
  • Published on 04/08/2020
  • 9 pages
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