RAISING MEDIUM TERM GROWTH PROSPECTS

SYLVIE GOULARDDEPUTY-GOVERNOR, BANQUE DE FRANCE

‘SPAIN – FROM RECOVERY TO RESILIENCE’ - BANCO D’ESPAÑA / IMF CONFERENCE, MADRID, 3 APRIL 2018

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The key challenges to raise growth

1. To safeguard multilateral frameworks / the UE

2. To invest in human resources

3. To better allocate capital (UE Euro area)

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OUTLINE

1. The benefits of EU membership: more trade and welfare gains

2. The cost of leaving it: the case of Brexit

3. The benefits of the euro: Better controlled inflation and resilience

4. The pay-offs (and costs) of reforms: The Spanish example

5. Medium term prospects have been consistently revised downwards since the GFC

6. A peril to the European social model

7. How to boost growth in a changing environment

8. A more inclusive labor market to support growth and tackle the ageing problem

9. Invest in education and lifelong training to improve matching between workers and firms

10. Innovation and competition: worrying trends in innovation diffusion but we must fight the ‘fat cats’

11. Better allocate capital : a Financing Union for Investment and Innovation

12. A network to cooperate and act on sustainable finance

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THE BENEFITS OF EU MEMBERSHIP: MORE TRADE AND WELFARE GAINS

Source : Mayer T, Vicard V. and Zignago S (2018), « The cost of non-Europe revisited », Banque de France WorkingPaper, mimeo.

Trade and welfare gains simulated between 2003 and 2014 (in %)

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AND THE COST OF LEAVING IT: THE CASE OF BREXIT

Estimations of the long term impact of Brexit on UK GDP(% difference from a “remain” scenario)

Note: bars show estimations intervals

-5,1

-7,9

-3,8

-6,2

-7,5

-10-9-8-7-6-5-4-3-2-10

WTO/FTA EEA/FTA EEA FTA WTO

OECD LSE HM Treasury

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THE BENEFITS OF THE EURO: BETTER CONTROLLED INFLATION AND RESILIENCE

Successful crisis managementBetter controlled inflation

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THE PAY-OFFS (AND COSTS) OF REFORMS: THE SPANISH EXAMPLE

GDP, cumulated growth over 2014-2017(%)

*except Ireland.

0

5

10

15

20

25

30

Unemployment rate(% of labour force)

France Germany Italy

Netherlands Spain Euro area

Source : OECD

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MEDIUM TERM PROSPECTS HAVE BEEN CONSISTENTLY REVISED DOWNWARDS SINCE THE FINANCIAL CRISIS

7.0

5.0

4.7

3.8

2.9

1.7

0

1

2

3

4

5

6

7

8

Vintages of IMF GDP forecasts for year N+5 (%)

Emerging World Advanced

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A PERIL TO THE EUROPEAN SOCIAL MODEL

Less inequality

More inequality

Gini inequality index: variation between 1995 and 2014(after taxes and transfers)

0,15

0,2

0,25

0,3

0,35

0,4

0,45

Sweden Germany France Italy UnitedKingdom

UnitedStates

2014 1995

Source : OECD

HOW TO BOOST GROWTH IN A CHANGING ENVIRONMENT

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A changing environment

Globalization and technological diffusion have been an engine for income convergencebetween countries

But also a source of growing inequalities between individuals and firms New technological revolution or secular stagnation ? Strong uncertainty about future productivity growth (Cette, Lecat, Ly-Marin, 2016)

Policy challenges

Making economic growth more inclusive

Identify the winners and losers from technological progress to target redistributive policies

Promote innovation and firm growth in an environment that spurs social mobility

Build a society of competences to increase labor force participation and improve matching

A MORE INCLUSIVE LABOUR MARKET TO SUPPORT GROWTH AND TACKLE THE AGEING PROBLEM

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30

40

50

60

70

80

90

Labor force participation rate, by age,in %, in Spain and in Japan

Spain 15-24 years Spain 25-54 years Spain 55-64 years

Japan 15-24 years Japan 25-54 years Japan 55-64 years

50

55

60

65

70

75

80

85

90

Labor force participation rate by gender (agegroup 15-64), in %, in Spain and in Japan

Spain Men Spain Women Spain Total

Japan Men Japan Women Japan Total

Source : OECD

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INVEST IN EDUCATION AND LIFELONG TRAINING TO IMPROVEMATCHING BETWEEN WORKERS AND FIRMS

Tackling structural unemploymentshould remain a priority

There are job vacancies even in countries with high unemploymentrate (between 200 000 and 300 000 in France in 2017)

The availability of skilled labour is an important concern for SMEs in the euro area (SAFE, 2017)

Investing in education, apprenticeship and lifelong training is crucial

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6

8

10

12

14

16

18

Structural unemployment rate,Non accelerating inflation rate of unemployment, in %

Germany Spain France Italy Euro area 15

Source: OECD

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INNOVATION AND COMPETITION: WORRYING TRENDS IN INNOVATION DIFFUSION BUT WE MUST FIGHT THE ‘FAT CATS’

OECD points to an increasing dispersion of productivity across firms =>

This could be related to differentphenomenons:

– OCDE: a decrease in innovation diffusion;

– BdF (based on French data): slow reallocation of factors after shocks(globalization, technological, financialcrisis…)

But it could also emerge from concentration and monopoly rents, intensified by the technology transformation where ‘the winner takes it all’

Need to create an environment favorable to investment and innovation whichbenefits to all firms and workers

ANDREWS, CRISCUOLO, GAL: ‘THE GLOBAL PRODUCTIVITY SLOWDOWN, TECHNOLOGY DIVERGENCE AND PUBLIC POLICY: A FIRM LEVEL PERSPECTIVE’ OECD/GFI (2016)

A FINANCING UNION FOR INVESTMENT AND INNOVATION

A “microeconomic” acceleratorA financing union for investment and innovation

Completion of Banking Union;

Consolidation of European banks

Incentives for cross-border investments;

Harmonisation of accounting, tax and insolvency

rules

Pan-European savings products;

European venture capital

Control of vital financial activities

and risks

Savingsexceed

investmentby about

350 bns EUR,but remains fragmented

Innovation and

digital

SMEs

Green financeand

energytransition

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Climate stability is, in the long run, part of the determinants of financial stability

An open and multilateral dialogue at a global level: the Central Banks and Supervisors Network for Greening the Financial System (so called NGFS) (8 Central Banks and Supervisors)

Work program for the coming years: experience sharing and identification of best practices on the supervisory and macro-financial dimensions of climate-related and environmental risks as well as on options to scale up green financing

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A NETWORK TO COOPERATE AND ACT ON SUSTAINABLE FINANCE: ‘NETWORK FOR GREENING THE FINANCIAL SYSTEM’

ANNEXE

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THE COST OF NON-EUROPE

Source : European Parliament Think Tank, « Mapping the cost of non-Europe, 2014-19 », December 2017

The European Parliament provides a regular assessment of potential gains of European common actions in selected fields

According to this approach, the cost of non-Europe is estimated at 1 751 billion EUR, i.e. 12% of total EU GDP

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AN EVER DEEPER INTERCONNECTION AMONG EUROPEANCOUNTRIES

Asia

North America

South America

Oceania

Rest of Europe

UE (non euro area)

Euro areaUK: 7.7%

Italy: 8.15%

Portugal: 7.3%

Germany: 11.5%

Source : OEC, MIT, 2016 data.Note: more than 40 academic papers have been published measuring the effect of the euro on trade.

France: 15.5%

Breakdown of Spanish exports by partners(in % of total exports - 2016)

There has not been any “fortress Europe” effect

But there is by now solid empirical evidence that intra-euro area trade in goods and services has risen by 12% on average since the introduction of the euro, and this without trade diversion

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A FINANCING UNION FOR INVESTMENT AND INNOVATION

Investment needs*

Expected flows fromJuncker plans**

Regulatorypolicies to implement

Sources :* EIB (2016); BACH database for PMEs data ** EIB, cumulated stocks at end 2017.

Competitive and reliable ITC

infrastructures

160 Bns €/year

28 Bns €

Digital single market

Digital tax

Access to equityfinancing

Equity/assets: 38% (euro area SMEs)

75 Bns €

Standardisedinformation

Insolvency laws

Renewable energyand conservation

230 Bns €/year

53 Bns €

Green bonds

Carbon marketsand pricing

Innovation et

digitalSMEs

Green financeand

energytransition