Tuesday, September 15, 2015

Governing the Banque de France

President Hollande has nominated François Villeroy de Galhau to be governor of the Banque de France. 150 economists, including François Bourguignon and Thomas Piketty, have signed a letter opposing this nomination for fear of "potential" conflicts of interest.

It's an interesting confrontation. Villeroy, an énarque (of course) whose "brilliance" everyone concedes, was the chief of staff of DSK when the latter served as finance minister. His former classmate at the ENA, Pierre Moscovici, attests to his "social conscience" dating from his youth. Villeroy has renounced a whole series of bonuses, stock options, deferred compensations, and the like from due him his time in the private sector. The JDD estimates the monetary value of these concessions at more than €1 million. Yet these sacrifices are not enough to allay the fears of the economists, who note the peculiar susceptibility of the banking sector to conflicts of interest.

No doubt the protesting economists know more about M. Villeroy de Galhau's outlook and commitments than I do. It nevertheless seems odd to make such an issue of this particular appointment, when another énarque with a similar experience of private banking, Emmanuel Macron, is already in the government and, according to polls, largely approved in his reform efforts by the general public.

What is really at stake seems to be a deepening split between the "managerial left" and an increasingly restive element within center-left parties across the developed world. The Corbyn victory in the British Labour leadership contest is one sign. The unexpectedly good performance of Bernie Sanders in the Democratic primary race in the US is another. Many on the left feel they have given the "managers" ample opportunity to prove that they know what they are doing, and the results are simply not there. Patience has worn thin. The resistance is coming not solely from angry radicals--although there are certainly some of those, especially in the UK. It stems rather from disappointed center-leftists. made anxious by the rising populist tide on the right and unconvinced that the seasoned leaders who acquired their "insider" experience in the pre-crisis years of social-liberal compromise with neoliberal institutions can steer center-left parties toward either electoral success or robust recovery. M. Villeroy de Galhau may be sacrificed on this altar of doubt. He may not be the right expiatory victim, but jettisoning him may nevertheless prove necessary--though almost certainly not sufficient--to placate the festering internal opposition, which thus far, and surprisingly, remains far milder in France than in Britain or even the US.


bernard said...

I am not sure that your analysis actually applies to the Villeroy case. To be sure, some of the signatories of this appeal are restive elements as you say, but far from all (Bourgignon, restive?!!!). I doubt such an appeal would have been even considered by any signatory had the other candidate, Benoit Coeure (presently deputy governor at the Bank and memeber of the ECB council), been chosen. The main difference between Coeure and Villeroy, professionally, is that Coeure is an economist, Villeroy is not. I suspect that this may actually be more relevant to the dispute. Just like Draghi is a professional economist which Trichet was not and, frankly, I like better the ECB's smarts under Draghi - even though he was a great sinner at G-S - than I did under his predecessor. To be sure, being an economist is no certainty of success at the helm of a central bank as Trichet's predecessor's example made abundantly clear, but I do think it is necessary.

Just for fun, I used to know Villeroy in the nineties and I had this joke about him which of course only works in English: the bloke thinks he knows about China because he knows about china...Try translating that one, Art!

Mitch Guthman said...

If I understand the economists’ letter correctly, their complaint is less with M. Villeroy de Galhauas an individual but rather that the revolving door between business and governments has allowed the financial sector to become an essentially self-regulating industry that is backed implicitly by the full resources of the state. As they point out, the dangers of allowing this have become particularly obvious since the financial crisis of 2008. Indeed, there is a wealth of evidence to show that the institutionalization of a system in which bankers select their own to serve as government regulators, with implicit great rewards for “team players” upon their return to the fold, was probably the main culprit in a crash that continues to devastate the world economy.

Villeroy de Galhau may indeed be the most noble of men but the conflict of interest is baked into his resume and cannot be avoided simply because his friends are prepared to vouch for his character. His friends can choose to avert their eyes but, ultimately, the question is simply unavoidable: Has M. Villeroy de Galhau forgone his bonuses, stock options, deferred compensations because of his zeal for public service or is he simply casting his bread upon the waters in search of the potentially far greater payday which would naturally be afforded to a governor of the Banque de France upon his return to the financial sector, provided, naturally, that he had proven himself to be a “team player”.

The point is that one shouldn’t allow the bankers to select their regulators and later pay them off according to how well they are seen as serving the interests of the bankers for essentially the same reason that we don’t want Don Corleone to be able to appoint (and compensate) the chief of police. It isn't personal. It's strictly business.

bert said...

Bernard, I may not have understood exactly what you mean about certainty of success, but in the case of Wim Diusenberg, being publicly shafted by France before your term even begins can make things an uphill struggle.
Trichet would seem to be a good example of someone who came up blamelessly through the Finance Ministry, and failed abjectly at the top, when it most mattered.

bernard said...

Bert, suffice it to say that every time dear old Wim was about to speak, market participants shuddered, wondering what misstep he was going to take this time. And yet he had been a highly respected professional economist. He just did not have essential communication skills.

bert said...

That's the hexagonal view, certainly.
Not saying for a moment that's inconsistent with being the correct view, you understand.
But Bercy fought like cats for a Frenchman, half-succeeded, and were determined not to let him settle into his truncated term.

Mitch Guthman said...


You are right that they wouldn’t have written this letter about Coeure but that’s not because of professional pique. As I understand the letter, their objection to Villeroy isn’t based on his having unsound views about economics or his lack of professional qualifications as an economist. Their objection is that Villeroy himself is an exemplar of the revolving-door between government and the financial sector that needs to be shut tight for the protection of the larger community.

However much of a paragon Villeroy himself might be, only a fool would hire a fox to protect the chicken coop. Place not your trust in somebody who regards you as food.

bernard said...


Where exactly did I imply professional pique? Personally, if I want to build an aircraft, I'll take an aeronautical engineer every time over a medical doctor... And that's why I, personally, would have preferred Coeure.

As for Villeroy's ethics, I for one am not worried about them. But then I used to work close to, though not for or with, him, so I have this claim that I have some insight. As far as I am concerned, the man is clean.

Mitch Guthman said...


If you weren’t implying professional pique (or at least turf-guarding by economists) when you said: “I doubt such an appeal would have been even considered by any signatory had the other candidate, Benoit Coeure (presently deputy governor at the Bank and memeber of the ECB council), been chosen. The main difference between Coeure and Villeroy, professionally, is that Coeure is an economist, Villeroy is not. I suspect that this may actually be more relevant to the dispute”, then I have misunderstood you, for which I apologize.

As for the substance, we seem to be going around in circles. My point (which I believe was also the main point of the economists’ letter) had nothing at all to do with the personal integrity of
M. Villeroy de Galhau. The point is that we desperately need to close the revolving door between government regulators and the financial services industry because:

(1) the banking sector has proven that the consequences of allowing it to regulate itself are certain to be catastrophic.

(2) regulators and other public officials are likely to be influenced by the revolving door’s implicit promise of lucrative opportunities for those who are seen as “team players” by the deep-pocketed banks and investment firms. Regardless of his personal integrity, M. Galhau knows, as does every observer, that there are guaranteed opportunities worth many millions of euros for a former governor of the Bank who has been a “team player” and every decision is overshadowed by the overarching question of whether a particular course of action was pursued to curry favor or to avoid endangering a golden future.

At a moment when public confidence in the institutions of government is already shaky, the appearance of undue influence and corruption casts a dark shadow over those institutions that can only be lifted by stopping the revolving door from spinning.

I also don’t see why an economist or a banker is more qualified than any other well educated person to be the governor of the Bank since it isn’t even remotely involved in the banking business. The job of a central banker is to regulate in the public’s interest and it is difficult to see how a banker or a person who likely will be seeking to return to his previous industry in an even more rewarding capacity is able to put the public’s interests above his own.

Finally, it’s nothing personal about this gentlemen and I do not question his integrity (although one might ask whether he would have been paid so well by his private sector employers if not for the prospect of his return to “public” service). The point is that the revolving door carries with it a conflict of interest that cannot be avoid by personal testimonials.

Bernard said...

Sorry to burst your certainties. BoF does not regulate the financial sector, the ECB does. As for salaries, what I hear is that Villeroy had refused the outrageous amount BNP had offered him, telling them to give him a decent salary instead. Conflicts of interest exist, of course, but when we discuss them,it is better not to be approximative.