François Villeroy de Galhau: Monetary policy in uncertain times Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the London School of Economics, London, 15 February 2022. * * *  Introduction I am very grateful to Iain Begg for the invitation to speak to you today, more than two years after my first intervention at the LSE. So many things have happened since then, and the Ukrainian crisis shows that uncertainty isn’t going away any time soon. The euro area, like many other economies in the world, is entering a crucial phase in the recovery from the covid-19 crisis. There is good news, there is bad news and the two are very much related to each other. Unemployment has fallen to its lowest level in the history of the euro area and real GDP surpassed its pre-crisis level in the final quarter of 2021. On the less positive side, shortages of materials, equipment and labour persist in some sectors whilst others still operate below capacity. This lopsided economy plus sharply higher energy and food prices caused headline inflation in the euro zone to accelerate to 5.1% in January. Core inflation is only at 2.3% but significantly higher than one year ago (1.4%).
The reasons are large year-classes approaching retirement age, increased longevity and a lower birth rate. Conditions are quite different in Iceland, where age distribution is changing more slowly than in most countries with similar economies. Iceland’s retirement pension system is based on all working persons saving a proportion of their wages in a fund which is then used to pay their pension. Taxes therefore does not need to be raised even if there is a proportional rise in the number of pensioners. In addition to pension funds, some pensions are paid through the national insurance benefit system and there are also voluntary supplementary pension savings schemes. Iceland’s pension system thereby fulfils what has been considered international best practice in this field [the three-pillar system]. Total assets of Icelandic pension funds were equivalent to 120% of GDP at the end of 2005. No other pension system in the world is on such a strong footing. At the end of 2004, when total assets of Icelandic pension funds corresponded to more than 100% of GDP, the figure for the Netherlands was just over 100% and for the US 80-90%. In the overwhelming number of industrial countries, total assets of pension funds were equivalent to less than 20% of GDP, and the ratio was even lower than 10% in many countries, including Germany, Italy, Belgium, Austria, Sweden and Finland. By comparison, assets of Norway’s Government Pension Fund (Petroleum Fund) last year were equivalent to 60% of GDP.