It is indeed a great pleasure for me to address you on this occasion.
I shall start by reviewing the foundations and analyzing the success of the French policy of disinflation and stabilization of the franc. Then, I shall discuss the latest economic developments in Europe, and I shall conclude with a few words about their implications for the Economic and Monetary Union process.
For more than ten years, the ultimate objective of French monetary policy has been to ensure price stability. This final objective has been explicitly stipulated by law since the beginning of 1994. The targeted limit on price rises for 1994, and the following years, is set at 2 %. This commitment must be seen as irrevocable.
For many years now, the French monetary authorities have set two intermediate objectives to ensure compliance with the final objective.
The first intermediate objective relates to the stability of the franc within the framework of the European Monetary System. France has participated in the Exchange Rate Mechanism since its inception in 1979. The franc's central rate has been unchanged vis-a-vis the strongest currencies of the EMS since the January 1987 realignment. This stability is essential for keeping prices and production costs stable, especially in an open economy such as France where foreign trade accounts for one fourth of GDP. It fosters the structural competitiveness of the French economy, as exporters can no longer count on devaluations of the currency to offset lost competitiveness.
Maintaining the external value of the franc has without any doubt been a key factor in controlling inflation. In turn, the control of inflation achieved in our country does not justify any realignment of the French franc in the ERM. This is why, in spite of the turmoil on foreign exchange markets in 1993, the franc has kept its value vis-a-vis the other strong currencies since the widening of the ERM fluctuation bands. As a matter of fact, the French authorities' commitment to the external stability of the franc was reasserted by the decision taken on 2 August 1993 to keep the central rates unchanged. Moreover, on this occasion, our partners had the opportunity to reaffirm that French economic fundamentals fully justified these rates.
The second intermediate objective is internal and relates to the growth of the broad money aggregate M3. The medium-term M3 trend must be consistent with noninflationary economic growth. It combines a real GDP growth potential of 2.5 % to 3 % and a rate of inflation not exceeding 2 %. This medium-term path has been chosen in preference to an annual target because the velocity of M3 can be subject to wide swings in the short run, as in 1993 when M3 shrank by 0.9 %. In the course of that year, massive portfolio shifts where triggered by a reshaping of the yield curve and by one-off discretionary measures, such as the Grand Emprunt d'Etat, privatization of public-sector firms and the change in the tax treatment of money-market funds. Most of the deviation of M3 growth from its medium-term trend in 1993 can be explained by these discretionary moves. This is why, despite these short run shifts, the growth of M3 remains a valid medium-term monetary policy target.
Nevertheless, it was deemed useful to widen the monetary authorities' perspective to include financing flows, so as to ensure proper understanding of monetary and financial developments in our economy. Monitoring Total Domestic Debt, which coves all residents' debt financing, is very important in times of major structural changes in monetary and capital markets, savings patterns and government financing. As in the case of M3, the Banque de France also keeps the medium-term outlook in mind when monitoring Total Domestic Debt.
These results are largely due to the fact that monetary policy became part of a co herent economic policy framework in which fiscal policy and wage cost moderation converged towards the goal of curbing inflation. Moreover, financial markets were modernized, unified and internationalized to promote transparency and rational resource allocation. However, there is still a need for greater flexibility in some markets, starting with the labour market.
France has enjoyed low and stable inflation for several years now. Its inflation rate has been lower than those of its main trading partners since 1990. The inflation differential between France and Germany, which stood at 6 % between 1982 and 1985, diminished gradually and has become negative since 1991.
Anti-inflationary policy has not hindered growth: the French record compares very favourably with the performances of the other main OECD countries. On the contrary, low inflation has improved the country's structural competitiveness and helped to rebalance our external accounts.
The risk premiums that money and capital markets had added to French interest rates in comparison to the rates on the stablest EMS currencies have been reduced drastically. For example, the long-term interest rate differential with Germany, which still exceeded 4 % at the beginning of 1988, vanished in 1993. It then reappeared with the turmoil on bond markets which has been going on since the beginning of 1994. However, French long-term rates remain closely aligned with the lowest levels in the European Union.
These developments reflect the enhanced credibility of French monetary policy, which is aimed at preserving the external and internal value of the franc, thus allowing the economy to benefit from the best financing conditions.
Experience has shown that the effectiveness of monetary policy depends increasingly on the "reputation" of the institutions responsible for setting and implementing monetary objectives. One of the necessary conditions for establishing this credibility is a clear and formal commitment to price stability. This commitment must be perceived as irrevocable. The new statutes governing the Banque de France since the beginning of 1994 were clearly drafted with this concern in mind and guarantee its independence.
France's monetary policy is now defined and implemented by the Monetary Policy Council, which is an independent and collegial body. The independence granted to the Central bank further enhances the effectiveness of the policy aimed at price stability, and this in turn fosters a favourable monetary and financial environment for renewed growth and higher employment.
I have only three remarks to make.
France went through a recession in 1993 induced by a contraction of economic activity in the fourth quarter of 1992 and the first quarter of 1993. But this recession was probably one of the shortest and least severe amongst G7 countries, with only two successive quarters of declining GDP.
Economic growth is now gathering pace in Europe. In France, we are experiencing a steady economic recovery which will have a significant impact on employment figures after the usual lag. The official forecast calls for growth of about 2 % in 1994 and about 3 % in 1995.
The Banque de France's cautious and gradual monetary policy measures have laid the groundwork for this recovery. Key rates have been cut in stages by around 400 basis points since the end of 1992. The repo tender rate has dropped from 9.10 % to 5 % and the 5-to-10 day repurchase agreement rate from 10 % to 6.40 %. This policy has enabled the French economy to benefit from low interest rates. Consequently it has contributed to the advent of a new growth cycle.
The good financial situation of private-sector agents, whose savings have reached high levels, has also helped to foster the recovery. Finances in the corporate sector in particular remain sound. In 1993, this sector posted a financial surplus of about 150 billion francs for the second year in a row and the self-financing ratio for investment remained at a historical high of about 110 %. This financial surplus should play a key role in the expected acceleration of corporate investment. Also in 1992 and 1993, households steadily reduced their debt and this has left them in a stronger financial s>