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00:00We have to begin with the political situation, given that the Prime Minister, Le Cornu, has just outlined his budget proposal.
00:06And, obviously, even after attempting to resign, he couldn't resign.
00:10Severe difficulties, but he has caved a little on pension reform.
00:14I know you're the governor of the central bank, but proposing suspending pension reform until after the next presidential election, is it a wise move?
00:23First, as you said, I'm only a central banker, and I'm an independent central banker.
00:30So, more than ever, I won't make political comments on the spot.
00:35What we can say about France is that we have, obviously, to reduce fiscal deficits.
00:41There was a first step this year to 5.4%.
00:45We must go to 3% in 29.
00:48It's our European commitment. It's also our national interest.
00:52And so, the step next year to 26 must be another significant reduction.
00:58I said it should be around 4.8%.
01:02We will see what the debate in Parliament will give as outcome.
01:08The budget presented by this new government is 4.7%, but, again, we will see.
01:13How do you see that happening, though, given that this current coalition wasn't viable without caving on pension reform, and that's going to cost 400 million euro next year, 1.8 billion the following year?
01:24Again, I won't comment on the details of the measure.
01:27It's not up to the central bank.
01:29It's up to the political and parliamentary debate to discuss about the measures.
01:34It's not our role.
01:36Let me stress perhaps two elements which are more favorable as a context.
01:41First, that the French economy is resilient.
01:43As a euro economy, we had good surprises, and we had to revise up our growth forecast for this year to 0.7%.
01:51It's not brilliant, but it's resilient.
01:54And second, which is very important for our political debate, that the popular support in public opinion polls for the euro is at the highest level ever rich.
02:0679% for French citizens, 83% for Europeans.
02:11So, it's not a debate about Europe and the euro.
02:15It's a debate about how to reduce the fiscal deficits, and we need this direction.
02:22Obviously, markets responded well, at least to this initial proposal, but perhaps that's because at least now the government doesn't immediately crumble.
02:30Are you concerned that French market turmoil will rear its head again, particularly if now the door is open to less fiscal consolidation?
02:38I think we have to reach a significant reduction of fiscal deficit next year.
02:44And the prime, again, the how it's not in our hands.
02:49I can only say that having less expenditures, having a better control of expenditures, not only for central government, but also for social and local expenditures, is part of the answer.
03:04We have the same social model as our European neighbours, but it costs us in France more than our neighbours.
03:13So, we should look very pragmatically at our neighbours, what is the most efficient solution.
03:18So, most of the solution belongs to the expenditure side.
03:22Part of it could be on the tax side, but again, it's a legitimate democratic discussion.
03:28We believe in democracy.
03:30Well, I do want to point out that political extremes could still scopper this government.
03:34There are confidence votes on Thursday, and as you know, obviously, Marine Le Pen's national rally or the far left have been in increasing positions of power.
03:43You wrote just a few months ago that the Banque de France's independence from political power is well asserted and widely recognised.
03:51Are you concerned that that may not be the case as we go forward and these extremes become more central?
03:56No, I don't see risk for the independence of the Banque de France or of the European Central Bank or of what we call the euro system for two reasons.
04:06The first one is a legal reasons.
04:08It's enshrined in the European treaty for the euro.
04:11And as I said, European citizens are very supportive of the euro.
04:17And second, I think our euro system, ECB, Banque de France, did a good job in fighting inflation.
04:24When we say with Christine Lagarde that we are in a good position today, 2.2% on inflation, very close to our target, 2% on interest rates, which is much lower than in the US or in the UK, we were successful in the victory against inflation.
04:43And public opinion is aware of that.
04:46Absolutely.
04:46And as you know, this is very important to stress, independence strengthens the credibility of the central bank, which helped to diminish the cost of the victory against inflation.
04:59We didn't have to raise interest rates as much as for a non-independent central bank.
05:06So independence is not a political theory.
05:09It's a very pragmatic solution to the inflation challenge.
05:14So, yes, it may be enshrined in various constitutions and various documents.
05:18But as we've seen here in the United States, credibility can be an issue for the markets, which can then impact the credibility of the central bank.
05:26And so that's where I would wonder if you would be concerned.
05:30And given that you're serving a second term now, which is to be up in 2027, have you given any thought to perhaps taking a step back and letting the current president, Macron, name your successor?
05:42Again, the U.S. debate is a U.S. one, but we all think that the Fed's independence is in the interest of the American economy and of the American people.
05:56So the European debate is different.
05:58And I don't see this debate on independence, be it in France or elsewhere in the U.R.
06:03I am in my job till 27.
06:06We will see.
06:07But, you know, having experience, a track record, a capacity to discuss with all my colleagues is of some help, I guess.
06:16Absolutely.
06:17And, you know.
06:18And we have debate about monetary policy, as you are aware.
06:20Of course.
06:21And we will get to that.
06:22But I am curious, just one more time, if you don't mind me asking.
06:26You were appointed by Francois Hollande, then reappointed again.
06:30You have had 10 years, you're chair of the BIS as well.
06:33Wouldn't it make sense, just as a, you know, a risk move to maybe step down and let somebody else, of your ilk, you know, that has the same leanings as you, potentially?
06:44I am dedicated to my job.
06:47Again, it's not under political consideration.
06:50It's very important.
06:51Can I add one thing?
06:52I was appointed by one president, re-nominated by another one from a different political majority.
06:59And in each case, there was also a vote in parliament, with more than 80% of MPs supporting my nomination from different political parties across the aisle.
07:11So, I think, again, independence is the name of the game, more than ever.
07:16Absolutely.
07:16And your record, not in question.
07:18To speak of monetary policy, last month you said there were risks to the downside for inflation.
07:24I'm curious, do you still see those risks to the downside?
07:26Have they moved up or moved down those risks?
07:28We are in a good place.
07:30But I fully agree with Christine Lagarde, our president, that a good place is not a fixed place.
07:36If I look to the risks to inflation, there are few risks upside.
07:42Especially because the EU decided not to retaliate against US tariffs.
07:47So, I see few risks on the upside.
07:50And there are some risks on the downside.
07:52Can I quote three of them?
07:54The increase of China's imports due to trade diversion.
08:00The possible increase of the exchange rate.
08:03And we have no target for the exchange rate.
08:05But we are very attentive to the consequences of a possible stronger euro on the inflation outlook.
08:12And the third factor is more technical, if I may.
08:16In our forecast for 27, we incorporate what we call ETS2, which would be an increase of the carbon price in Europe,
08:25which is not yet implemented and not yet politically fully decided.
08:29So, there are more risks on the downside.
08:33That said, we should implement what I call agile pragmatism.
08:38We look at data and forecasts.
08:40And agile, we must be ready to move.
08:43But consistently with my analysis of risk to the inflation outlook,
08:48I would say that if, I stress if, if there is a next move,
08:53a rate cut is more possible, more likely than a rate hike.
08:57When might you see something like that materializing?
09:01If, as you say, if it materializes?
09:04We'll see.
09:05We have forecast each quarter and we can adapt to in each of our monetary meetings.
09:11So, I will not give a calendar because this would be precisely contrary to what I call pragmatism.
09:18We are data driven.
09:20What is important is not only actual data.
09:22It's also our forecast and possible downside risk to the inflation target.
09:29This is perhaps an important point to stress that we regained confidence in our forecast.
09:37And if you look at our last meetings, they didn't change much.
09:41So, it's a very important element of our assessment and decision.
09:46May I ask you about Russia, Ukraine, the European Union, considering monetizing frozen Russian assets to varying degrees.
09:53There's a spectrum thereof of thoughts on this matter.
09:56Where do you fall on that spectrum?
09:58How much do you think that something like that, depending on how far it goes, would hurt the euro?
10:03First, it's a decision on the political side in the G7 with the finance ministers.
10:09I happened to be in Ukraine three weeks ago.
10:12I visited my Ukrainian colleague, Andrei Pichny, and I was really impressed by their resilience and their courage.
10:20So, we must go on helping them, including with a strong financial support.
10:24For this question of Russian assets, we shouldn't do anything which would be contrary to the international rule of the euro and to international law.
10:34So, the various options which are on the table at present are more speaking about a loan.
10:42That said, I will not go further, but we must remain consistent with international law.
10:50And insofar, it will not affect the role of the euro.
10:54Final question, Governor.
10:56Given how concerned you are about deficits, particularly the French deficit and that it gets to the 3% target,
11:02are you concerned more broadly about what's become known as this debasement trade,
11:06that global yield curves will continue to steepen and that we might even see a sovereign debt crisis before too long somewhere in the world?
11:14No, I don't think so.
11:16And we must be consistent, as said, in our fiscal policies.
11:21Because if you look at the evolution of long-term yields in the euro, there has been a remarkable move towards convergence.
11:30The spreads between Germany, which was the core, and other countries has diminished.
11:35French is, I hope, a temporary exception due to this difficult political situation.
11:43But the move to convergence within the euro area is remarkable.
11:47And remember what we said 10 years ago, after the great financial crisis,
11:53that there was a split between the core and the periphery, or between north and south,
11:58we no longer see it.
12:00So I would say the euro area at present is very strong,
12:04and the euro is a decisive support for national fiscal policies.
12:10But they must reduce the deficit, starting with my own country.
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