Villeroy de Galhau: Central banks must be humble, nimble, independent
François Villeroy de Galhau, the departing head of the Banque de France, reflects on a decade of central banking challenges. He draws four vital lessons on monetary policy, independence, international cooperation, and European integration.
Soft landing, but tools questioned
When Villeroy de Galhau became governor in 2015, the decade proved anything but plain sailing, testing deeply held convictions.
Monetary policy worked, achieving a soft landing by bringing down inflation without a recession, despite facing deflation risk from Covid-19 and an inflation surge from Russia's invasion of Ukraine.
However, some unconventional tools from the post-2007-09 crisis era, like long-dated forward guidance and negative interest rates, appear less convincing today, straining economic common sense.
Balance-sheet instruments, including quantitative easing, proved remarkably effective.
Central banks now aim to be humble and nimble, data-driven, deciding meeting by meeting, working with scenarios, and focusing firmly on price stability, which also includes attention to climate risks.
Independence and pragmatic plurilateralism
Central bank independence, a prerequisite for effectiveness, faces a growing threat today, a challenge barely thinkable a decade ago.
Modern monetary policy relies on trust in central banks' commitment to price stability, explaining the relatively quick disinflation of the early 2020s.
This "agency" framework, with a clear mandate and autonomy, could inspire governance in areas like energy decarbonisation or AI.
With multilateralism in critical condition, "pragmatic plurilateralism"—selected countries working together on specific issues when interests converge—is the way forward.
The Network for Greening the Financial System (NGFS), launched from the Banque de France in 2017, exemplifies this approach, focusing on shared public goods like financial stability and common rules for banks (Basel III).
Europe: Robust but not agile enough
Europe's solidity has grown, marked by stronger EU attachment and a consolidated euro, yet it remains robust but lacks agility.
Accelerated innovation and productivity demand reconciling Keynes's social model with Schumpeter's creative destruction, and faster governance.
A mobilising target date, such as January 1st, 2029, for economic and financial sovereignty, could transform challenges into a golden opportunity.