François Villeroy de Galhau: The Eurosystem and its monetary policy - from an "impossible dilemma" to a possible roadmap for normalisation

Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Global Interdependence Center, GIC's Central Banking Series, Paris, 6 May 2022.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
06 May 2022

Accompanying slides can be found on the Bank of France's website

Good morning, and welcome in Paris for this new GIC-Banque de France Conference.

Europe is facing an historic turning point with the Russian aggression against the democratic state of Ukraine. The economic consequences of this war are maximal in Russia, with a GDP fall of –8.5% expected this year, but also sizeable in Europe: more inflation, less growth, and above all more uncertainty.

That said, we shouldn't at this stage rush to the stagflation conclusion: the carry-over in growth for the euro area in 2022 is already 2,1 % at the end of Q1, after an actual growth rate of 5,4% in 2021. Unemployment is at a historically low level at 6.8% in March.

Admittedly, these are rough waters that monetary policy is currently navigating. Some allege an "impossible dilemma" between fighting excessive inflation and escaping recession.

I don't think so. There are arguments in principle against the dilemma: legally, our mandate clearly prioritises price stability; politically, our fellow citizens care first and foremost about inflation and its impact on purchasing power; and economically, entrenched inflation would mean less confidence, higher risk premia, and greater price distortion, hence less long term growth. But today, I will discuss from the operational standpoint about the journey toward normalization of our monetary policy. This journey is delicate, but I am confident that we can successfully manage it. We have already clarified its first part. At our Governing Council meeting under Christine Lagarde's leadership in December last year, we agreed to phase out net purchases under the Pandemic Emergency Purchase Program (PEPP), which has now smoothly ended.At our March and April meetings we decided to wind-down the monthly net purchases under the APP, and to end them in the third quarter.