Interview with the Governor de la Banque de France

Brexit has been a central topic for the past months. How do you expect Brexit to impact financially and economically the EU countries?

Brexit is bad news, first and foremost for the UK and its economy, and to a lesser extent for Europe. Obviously we have to respect it as well as the choices of the British government in the negotiations to come. A key question is what solution the UK will choose regarding its single market access. Will it want full access or will it favour a third-country type of agreement? Even though we cannot make any assumptions at this stage as to the outcome of the negotiations, we can still state clear principles and stick to them: if the UK wants to keep full access to the European single market, it will have to apply all its rules, including the free movement of persons and workers. And there can be no free riding, and no cherry picking.

Do you have any specific fears for the French-British trade relations?

Trade policies are not a domestic responsibility in the EU, and that is a very good thing. I have no concerns about British-French trade relations specifically.

After Brexit, London may no longer act as the financial centre of Europe. Many argue that Frankfurt, Amsterdam, or Paris might be the main beneficiaries of this shift. However, for the French capital, experts name taxation and less flexible labour laws as the main obstacles for Paris to possibly succeed London. How do you rate the potential for success of the French financial capital and what should be done to allow Paris to prosper in the future?

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The answer to this question will greatly depend on the kind of financial agreement we reach with the UK. If the UK were to choose a “hard Brexit”, this would in particular mean the end of the European passport for the City of London. Again, for the UK to maintain access to the single financial market, all the usual EU rules must be strictly respected. Without this, some financial institutions based in the UK would have to adjust their legal and operational frameworks in order to continue to operate in Europe, including relocating to the continent – be it in Paris, Frankfurt, or elsewhere. That is the rule of the game. If this is the case, there will be probably friendly competition between the various places mentioned. Paris has a number of advantages: its size as a large international city, the most robust banking system in the euro area, major players in the insurance sector, financial know-how and a highly-skilled workforce, as well as new initiatives to enhance attractiveness with notably tax measures. And the French authorities, including the Banque de France, attach importance to ensuring that Paris is one of Europe’s strongest and most attractive financial centres, and even more so after Brexit.

It is no secret that current monetary and economic union cannot function without institutional and fiscal convergence. Having an EU finance minister is one of the ways to approach this dichotomy and reach some coordination. In the long run, do you see the EU reforming itself within the framework of existing treaties? If not, what has to be changed?

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Our monetary union is a success:  we built a solid and internationally-recognised currency, the euro, which is one of the very strong assets of the Europeans together with the single market. But we have failed to follow it up sufficiently with other economic policies. Indeed much remains to be done for economic union.

I suggest three steps to achieve this. The first can be done quickly as it does not require any treaty change. Europe needs to build what I call a Financing and Investment Union to steer its abundant savings – a 350 billion surplus each year – into productive investment. There are two objectives: increasing the diversification of firms’ financing – with more equity financing, and enhancing the resilience of the euro area thanks to private risk-sharing across domestic borders.

The second step for the euro area is a collective economic strategy, combining more structural reforms where they are needed, such as in France, and more fiscal support in those countries with room for manoeuvre, such as Germany. In practice, for this level of coordination to exist, the euro area would need an institution that fosters confidence, which could consist of a “Finance Minister”. In terms of timing, this second step can only reasonably come after the elections scheduled for next year in some euro area countries, as it requires changing the European Treaties.

In the longer run, the third and final step would be to complete the Economic and Monetary Union with a European fiscal capacity. This would first require greater convergence and deepening the sense of trust between Member States.

by Dominykas Šliažko and Nhu Nguyen


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