“The drift of public debt in France is worrying”: Villeroy de Galhau – Nagel, the debate

The drift of public debt in France is worrying Villeroy

Their speech is rare and each word is weighed in the trebuchet. L’Express brought together the “bosses” of the two major central banks in the euro zone: François Villeroy de Galhau, Governor of the Banque de France and Joachim Nagel, President of the Bundesbank. They agreed to talk about the consequences of the war in Ukraine, the future of inflation, rising interest rates and the need to square the fiscal accounts. If in the Franco-German couple, the fractures are numerous, this duo rather plays in unison. Cross interview.

L’Express: The war in Ukraine has upset all the balance. To what extent did she accentuate tensions between France and Germany ?

Joachim Nagel: Regarding the conduct of monetary policy, there is no tension. François and I totally share the idea that we must resolutely fight against inflation. Russia’s attack on Ukraine was a shock. This called for a strong response and that is what we did in 2022 at the Governing Council of the European Central Bank by raising interest rates sharply. This threat has further strengthened our common efforts to fulfill our mandate: we are the monetary policy makers. Our job is to maintain price stability in the euro area. And the rise in prices today is still far too high throughout Europe.

Francois Villeroy de Galhau: I will rather answer by widening the focal length. Our two countries are facing a common threat with this terrible invasion of Ukraine, which takes several forms. First of all, increased mistrust towards us from our partners in Eastern Europe. Then the acceleration of inflation: we responded to this partially together by normalizing monetary policy. It remains to build a common response to reduce our dependence on external fossil fuels and accelerate the decarbonization of our economies. The comparison with Covid is encouraging: at first, Europe gave the impression of playing the everyone-for-himself card. And then, we managed to put in place very effective coordinated responses: the joint purchase of vaccines, the major “Next Generation EU” recovery plan. We also have to get there today.

France has lived in recent years in a form of complex in relation to the economic superiority of Germany. Do you think that the situation is being rebalanced between the two countries?

FV of G.: In fact, the complex of which you speak is rather a characteristic of Europe: its lack of confidence when it compares itself with the rest of the world, in particular the United States or China. Regarding the relationship with Germany, we French people have no complex to have. I admire Germany’s success, but France also has its assets: demography, nuclear energy, defence… The only real competition that matters is that of Europe with the rest of the world.

JN: I don’t quite understand this idea of ​​a complex! Our countries have developed by encouraging healthy competition between different ideas and solutions. This applies as much to the economy as to sport… And we have everything to gain from this competition.

The war in Ukraine revealed the fragility of the German model with a double dependence, on Russian gas for its energy supplies, on China for its exports. Is the German model in danger?

JN: In finance, the right strategy is to diversify your portfolio. And yet, before February 24, 2022, Germany sourced about half of its gas from Russia. Today, we have managed to diversify our sources and reduce the risk of dependency. As far as Germany’s energy supply is concerned, liquefied natural gas is an intermediate step towards a less risky and more sustainable energy model. When it comes to German exports, I have no doubt that companies are now looking at all possibilities to increase their resilience.

FV of G.: I am always careful with the notion of “model”. Nothing is ever acquired. What is important is a country’s ability to adapt. And there, that of Germany remains remarkable. Think of the quality of social dialogue across the Rhine and the capacity for compromise, the balance between territories, the strength of ETIs or Mittelstand. So I wouldn’t bury the German model too quickly: remember that at the end of the 1990s, people spoke of Germany as the sick man of Europe.

The inflationary shock is partly exogenous in nature. Some economists claim that the strategy of continuing to raise interest rates would not be the right one… Does this annoy you?

JN: The truth is that inflation had already started to rise before the war in Ukraine. The pandemic caused supply and demand shocks, as did the lifting of restrictions that followed. The war was a major catalyst. Energy prices soared and, over time, inflationary pressures spread throughout the economy. It suffices to follow the heart of inflation, ie the increase in prices excluding energy and food. In December, it reached 5.2% year-on-year in the euro zone. It’s way too high. And socially unjust. Everyone is affected: families, businesses, but the people most affected are those who have very little at the start, the poorest. Our work is not yet finished.

FV of G.: Yes, we will probably peak on interest rates by next summer, and inflation will come back down to the 2% threshold by the end of 2024 to 2025.

Given the debt levels in Europe, aren’t you afraid of a new debt crisis in Europe, especially if interest rates continue to rise?

JN: The governments were right to act forcefully on the consequences of the war against Ukraine. But now, things have to get back to normal, healthier public finances have to be restored. Governments should not try to stimulate demand through large-scale programs when inflation is so high!

FV of G.: I will be very frank: I am concerned about the drift of public debt in France. In 1980, the public debt ratio was 20% of GDP, it reached 100% before the Covid and it peaks today at 112%. We have to come out of two illusions. The first is that the debt would cost nothing: the ultra-low rates were a parenthesis. The second is that it would always take more public spending and debt to generate growth. It’s wrong. Otherwise, we French would be the world champions of growth! We absolutely must have a debate on the quality of our public spending. It costs around 10 points of GDP more than in our European neighbours. I deeply believe in our common social model, but by being more demanding on our public efficiency.

What great step must Europe take today?

JN: With regard to the financial markets without hesitation: the capital markets union. To carry out the energy transition, several hundreds of billions of euros will have to be invested in Europe each year. States cannot do everything and the major part of this sum will have to come from the private sector. However, the financial markets today are too compartmentalized, and the regulations are not all harmonised. Investment funds and more generally venture capital in Europe are too small compared to what we observe in the United States. We need to create a single financing market.

FV of G.: Yes ! Europe has a lot of savings and a lot of green projects to finance. It is therefore necessary to create a powerful channel between the two. Unfortunately, we sense little appetite from political leaders for this topic…

What can Germany copy from the French model and conversely what should France learn from its neighbor across the Rhine?

JN: French pragmatism.

FV of G.: German social dialogue. And I find Joachim’s answer on France interesting!