Desperately searching for funds to plug a gaping budget deficit, France’s ambitious new Finance minister, Nicolas Sarkozy, spotted what looked like an easy target: the gold reserves held by the Bank of France. Just days after taking office in early April, Sarkozy called on the bank to sell some of its E34 billion ($41 billion) gold stock and use the proceeds to finance research institutes or help pay down the nation’s E1 trillion debt.
Not so fast, responded Christian Noyer, the recently appointed governor of the Bank of France. His soft-spoken manner is about as far removed as one can get from the bold assertiveness of Sarkozy, arguably France’s second-most-powerful politician, but he wasn’t about to let himself be steamrollered by the minister. The gold may belong to the French nation, he says, but only the central bank can decide whether to sell it and how to use the proceeds.
“This asset is in the balance sheet of the Bank of France, so it belongs to the Bank of France,” Noyer tells Institutional Investor. “This is something that belongs to the same area of independence as monetary policy.”
Noyer will need his independent streak in the coming months: Political pressure on him is rising. In addition to taking aim at the bank’s gold reserves, Sarkozy has sharply criticized the European Central Bank, where Noyer sits on the 18-member governing council, for refusing to cut interest rates to stimulate the euro zone’s lethargic economy. In April, Sarkozy clashed with Noyer and ECB president Jean-Claude Trichet at a meeting of Group of Seven finance ministers and central bank governors in Washington, reportedly telling them that although he supports central bank independence, “I do not want to be virtuous but dead.”
Those who know Noyer have little doubt that he can withstand the pressure. A longtime Treasury civil servant who has spent most of his career loyally carrying out the commands of French finance ministers, Noyer has become a wholehearted disciple of central bank independence since he was appointed as the ECB’s first vice president, just before the launch of the euro. He served in Frankfurt for four years, until 2002; last November, after a stint advising his old employer, the French Treasury, Noyer was appointed Bank of France governor, succeeding Trichet, who moved to the ECB.
“He’s very strong on principles,” says Barclays Capital European economist Jacques Delpla, who worked with Noyer in the mid-1990s as a member of the staff of former Finance minister Jean Arthuis. “He really believes in central bank independence. And he has nothing to lose at all.” His six-year term as governor, the top nonpolitical post in France, runs until 2009, and the government can’t seek to influence him by dangling the prospect of an ECB job because European rules prevent a repeat posting, notes Delpla.
Noyer asserts his independence in a characteristically low-key manner. In an interview in his elegant office in the Hôtel de Toulouse, the 17th-century mansion that houses the Bank of France on Paris’s Right Bank, the governor politely but firmly resists calls for lower interest rates, pointing out that when the Bundesbank was dictating European monetary policy, it never had rates as low as the ECB’s are today.
“The facts are that monetary policy in Europe is extremely accommodative,” Noyer says. “Rates are at historic lows in real terms. In no survey do people say that the cost of finance is impairing either investment or consumption. That is clearly not the problem.”
Instead of blaming the ECB, he says, governments need to tackle Europe’s well-known structural problems: overregulated labor markets, excessive bureaucracy, big deficits and high tax rates. “The potential growth rate is too low. It’s too low because our economies are not flexible enough. What we desperately need is structural reform to enhance the potential growth rate,” he argues.
These views place Noyer firmly in the mainstream of central bank orthodoxy in the 12-nation euro zone -- hardly surprising for a career civil servant accustomed to defending his institution. But for some ECB watchers, that orthodoxy is part of the problem with euro-zone policymaking. With the exception of the recent appointment of economist Axel Weber as president of the German Bundesbank, governments tend to appoint central bank governors based on bureaucratic skills or political allegiance rather than economic and monetary policymaking expertise. The result, critics fear, may dull the policy debate inside the ECB and make the bank less responsive to shifting economic currents than the U.S. Federal Reserve Board or the Bank of England.
“You should have a competition of ideas” in setting monetary policy in the euro zone, says Barclays Capital’s Delpla. “The sad thing in Europe is that, outside of the ECB or the Bundesbank, no ideas come out of the national central banks.”
The Bank of France, like all national central banks in the euro zone, is struggling to define its role five years after the launch of the single currency. The bank no longer sets an independent monetary policy, and its massive 211-branch domestic network is a relic with little economic rationale. The challenge for Noyer is to maximize his influence on the monetary policy debate in Frankfurt even as he manages the politically sensitive downsizing of the bank’s French operations and fends off political pressure from the likes of Sarkozy.
Noyer’s influence on monetary policy is hard to detect. When the ECB’s rate-setting governing council meets, the French governor shares the table with 17 other bankers. “He’s just one among the others in the game,” says Philippe d’Arvisenet, chief economist at BNP Paribas in Paris. That fact makes it difficult for any governor to exert strong influence over policy unless he or she can persuade colleagues with a compelling economic analysis. Noyer is not an economist by training, however, and the Bank of France’s economic research department is not exactly high-powered, either. Largely as a result, analysts say, it is hard to detect much French sway in Frankfurt, apart from Trichet.
“The value of a national central bank is the weight the governor carries in the council of the ECB,” says Francesco Giavazzi, a monetary economist at Milan’s Bocconi University and a leading ECB watcher. “If you have a good research department and people who brief you well, then you can impress your colleagues and have an influence on policy decisions.” Despite his experience as a former ECB vice president, Noyer “was and remains a lightweight on the board,” Giavazzi contends.
Domestically, Noyer faces equally daunting challenges -- and not just to his gold reserves. The central bank has a proud history as one of the leading institutions in France. It was founded by Napoleon in 1800 to help spur the economy after the ravages of the French Revolution, and the bank’s imposing branches remain a powerful symbol of state power as well as a source of jobs. The bank’s grandiose dimensions far exceed today’s needs, however. Under a restructuring plan agreed upon just before Noyer took over as governor, the Bank of France expects to shut down more than half of its branches by 2006 and reduce its payroll by 17 percent, eliminating more than 2,600 of its 15,000 jobs. Unions staged several strikes before the plan was approved last fall, and Noyer will have to play a skillful hand to prevent any flare-ups of labor strife as he carries out the restructuring.
Even after the cutbacks, the bank will remain bloated by central banking standards and is likely to face pressure for further downsizing. The Bank of France posted a loss of E179 million in 2003 after making provisions of E275 million for restructuring costs, compared with a profit of E159 million a year earlier. The bank, which derives its revenues from managing foreign currency reserves, earning seigniorage on the issuance of notes and coins and selling financial data and analysis to commercial banks, hasn’t paid a dividend to the government for the past two years, and Sarkozy will be eager to see the dividends restored to help his budget woes.
“Carlos Ghosn would have been an excellent choice for governor, because that’s what is needed,” says Delpla, referring to the executive who restored Nissan to profitability with swingeing cutbacks.
As these challenges suggest, the governorship is a terrifically complex job. Helping to guide monetary policy for the far-flung euro zone demands a very different set of skills than does the task of steering a large bureaucratic organization through a painful restructuring. Noyer was the only candidate for the post with credentials in both areas, having served not only as ECB vice president but also, earlier, as director of the Treasury, the top managerial post in the Finance Ministry’s sprawling bureaucracy. Just as important, he had the right political associations, having advised thenFinance minister Edouard Balladur in the late 1980s, during Jacques Chirac’s premiership, and then serving as chief of staff to Edmond Alphandéry and Jean Arthuis when they were Finance ministers in conservative governments in the mid-1990s.
“Noyer has the advantage of having a good experience in monetary policy and in managing a large institution,” says Olivier Garnier, head of strategy at Société Générale Asset Management, who worked with Noyer on Arthuis’s staff. “He is not an economist, but he knows the issues very well.”
Noyer’s profile contrasts sharply with that of Axel Weber, the new president of the Bundesbank, which faces many of the same challenges as the Bank of France. The German central bank is embarking on an even bigger restructuring that will slash its workforce from 14,000 down to 9,000. But when Chancellor Gerhard Schröder selected Weber, one of Germany’s leading monetary economists, he clearly was more concerned with choosing a leader who could maximize Germany’s influence on ECB monetary policy.
Many European policymakers hope that Weber’s selection will raise the level of debate inside the ECB, much as the arrival of Ben Bernanke, the former Princeton University economist, at the U.S. Federal Reserve Board of Governors energized that institution and sharpened policy toward warding off the risk of deflation. Expertise rather than political clout is the best way for governors to throw around their weight in Frankfurt. “It’s more important for each of the central bank governors on the governing council to have a good dossier -- good arguments -- in his briefcase,” says one senior ECB official.
So far, however, many governments seem to rank political considerations above intellectual firepower when selecting their central bank chiefs. When Matti Vanhala, one of the euro area’s more influential governors, was stricken with cancer and resigned as head of the Bank of Finland earlier this year, the center-left government appointed as his successor a leading Social Democratic politician with no central banking experience, European Commission member Erkki Liikanen. The opposition National Coalition Party criticized the decision, arguing that the post should have gone to Sixten Korkman, the Finn who is director-general for economic and monetary affairs at the European Union’s Council of Ministers in Brussels.
Noyer recognizes the need to sharpen the Bank of France’s analytical capabilities. He sees his role as akin to that of a president of one of the U.S. Federal Reserve’s district banks: someone who keeps a close eye on the pulse of the regional economy -- in his case, France -- while also getting better information about the entire euro zone and the impact of ECB policy. “I need to have views on the euro area as a whole and not just France,” he says. “We all need to add something to our own research analysis.”
The bank’s economists increasingly collaborate with their counterparts across Europe on research projects coordinated by the ECB that focus on how the ECB’s one-size-fits-all monetary policy affects different national economies and the way inflationary pressures are felt across the euro area. “Our governor can’t go and simply listen to what [ECB chief economist] Otmar Issing has to say. He needs his own expertise,” says Marc-Olivier Strauss-Kahn, head of economic research at the Bank of France. The bank also has worked to improve and expand its publications; 18 months ago it launched the semiannual Financial Stability Review, modeled on the Bank of England’s benchmark publication of the same name. Despite all the talk of the importance of research, however, the bank hasn’t added any economists to its staff.
Overall, the output and quality of the bank’s economic research remain less than stellar. A recent study by two of the bank’s own economists rated its research fifth among European central banks as measured by the number of papers appearing in top-ranked economic journals -- far behind the Bank of England and trailing the central banks of Italy, Spain and Portugal. Though Strauss-Kahn enjoys the respect of his fellow economists, he has almost no public profile outside the bank. It’s part of the bank’s autocratic tradition, exemplified by Trichet’s domineering presence during his ten-year reign, that the governor alone makes policy speeches. By contrast, Bundesbank vice president Jürgen Stark and chief economist Hermann Remsperger speak frequently in public, as do most members of the Bank of England’s monetary policy committee.
The central bank “needs a chief economist who can speak in public and be visible,” says Christian de Boissieu, the head of Prime Minister Jean-Pierre Raffarin’s Council of Economic Analysis, who was reportedly considered for the governorship. Such activism could help improve the monetary policy debate in Europe and strengthen the credibility of the Bank of France, and the ECB, with the public and with financial market participants, de Boissieu contends.
Noyer’s own profile is decidedly low, in marked contrast to Trichet’s. In large part, this reflects the bank’s diminished role compared with a decade ago, when Trichet was instrumental in defending the franc’s link to the deutsche mark and keeping the monetary union project alive. Noyer “doesn’t have the clout that Trichet did because Trichet is the guy who won the battle against speculators and built this alliance with the Germans,” says Eric Chaney, senior European economist at Morgan Stanley in London.
Modesty is also Noyer’s personal style. His smooth manner and unflappable demeanor are effective in close quarters, as befits a top-flight graduate of France’s elite Ecole Nationale d’Administration, but he is clearly uncomfortable on the public stage -- he has made only two public speeches since taking office in November. In a private interview he speaks so softly that his words fail to trigger a voice-activated tape recorder.
The gold spat with Finance Minister Sarkozy has thrust the spotlight on him, however. When the minister first proposed selling some gold in April, Noyer immediately responded by giving an interview to newspaper Le Parisien in which he insisted that such a move, though possible, was for the bank alone to decide. Bank officials privately express scorn at the way Sarkozy and Raffarin first raised the idea -- Raffarin in a February speech at a conference of the ruling Union for a Popular Movement party and Sarkozy in Parliament two months later -- appearing to suggest that the government could raise billions by selling gold.
In fact, any sales would have at best a marginal impact on the Treasury. Under a recent agreement among European central banks to allow increased gold sales, the Bank of France could sell 100 tons a year, worth roughly E1 billion at current prices. EU rules governing the pooling of reserves prohibited the proceeds from being turned over to the government, but the central bank would be able to invest them in interest-bearing assets and pay part of the earnings to the government as a dividend. At today’s low interest rates, such an operation would generate less than E50 million a year -- peanuts for a government with a projected deficit of more than E45 billion.
“This is a nonstory,” Noyer deadpans.
Sarkozy’s pressure for lower interest rates rankles more because it touches on the core of central bank independence. Noyer insists that it is “nothing but normal” for him and the minister to discuss economic and monetary policy as long as each side respects the fact that governments are responsible for budgets and central banks for interest rates. “It’s more appropriate that this kind of discussion happens in private and not in public, because public debate risks creating confusion and misunderstanding,” Noyer says. “If the public feels that the central bank is giving in to pressure and that therefore price stability is at risk, the results for the economy could be extremely bad.”
The rebuke, softly spoken but firm in intent, is pure Noyer. The governor’s low-key style goes down well inside the bank, a fact that should help him carry out the restructuring. Noyer’s willingness to consult with staff and unions is a welcome change from Trichet’s imperious style, contends Patrick Macaire, a senior official at the bank’s biggest union, the Syndicat National Autonome du Personnel de la Banque de France. But in the long run, he adds, Noyer may be more radical in downsizing the bank. Whereas Trichet sold his restructuring plan as a once-and-for-all downsizing, Noyer made clear in his first meeting with staff that he wouldn’t rule out further cutbacks. But he sought to enlist workers’ help in reshaping the bank by asking them, “In what conditions can you do better?” Macaire recalls.
Cutbacks will certainly remain on the agenda. Slashing branches from 211 to 96 may sound dramatic, but it’s modest compared with an initial staff proposal to cut to just 25 branches, which was rejected as politically untenable. Parliament is considering allowing private companies to compete for the business of collecting old bank notes and distributing new ones, one of the main functions of the branches.
“Everybody is convinced that in a few years there will be new cutbacks. It’s very demoralizing,” says Odette Scherrer, the union’s national secretary.
Don’t expect Noyer to dismantle the Bank of France, though. It remains responsible for banking supervision in France, unlike the Bundesbank, which has given up that job to a new German regulatory agency. And Noyer defends the political decision to give the bank a new role in helping overindebted consumers work out repayment schedules with creditors.
“You cannot compare this central bank to another central bank,” he says. “This is what the national context requires. We try to do the job with maximum efficiency. Our task is to provide the best service at the lowest possible cost.”
