27 August 2015

ECB: Drawing lessons from the crisis for the future of the euro area

Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at “Ambassadors Week”, Paris.

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1. The paradox of the euro during the crisis

It should be noted, first of all, that the euro has proved to be something of a paradox: confidence in the single currency remains very high, despite the fact that the euro area is struggling to emerge from the crisis and the fragilities of our economic and political union have threatened the integrity of the euro area on several occasions. [...]

There are several different factors that could explain that confidence in the single currency. First of all, the euro forms an integral part of the European identity. It is also considered to guarantee stability (by protecting purchasing power) and provide protection against the risk of exchange rate crises. This aspect is directly linked to the credibility of the ECB’s monetary policy, which has demonstrated its ability to act to maintain price stability. Finally, sharing a currency establishes common interests, from both a financial and a geopolitical perspective.

We can build on that confidence in the euro in order to strengthen our monetary union. The ECB’s fundamental objective is to protect the euro, hence it is imperative that we fulfil our mandate by keeping inflation below, but close to, 2%, which explains all of our monetary policy decisions during the crisis.

b) The fragilities of our economic union

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The crisis showed that excessive imbalances and fragilities had been allowed to develop in a number of euro area countries in the absence of sufficient safeguards: investment in the housing sector instead of the productive economy, excessive risk taking in the banking sector and massive external indebtedness. Participating countries have taken the benefits of the euro for granted without acknowledging their shared responsibility. The negative effects of this process became brutally apparent during the euro area sovereign debt crisis, and even now, five years after that crisis began, they are still weighing on economic activity and employment.

The consequences are not just economic; they are also political. In the worst affected countries, convergence in GDP per capita has been reversed, casting doubt on one of the fundamental objectives of the single currency. Unemployment hits the young hardest, creating a lost generation. What is more, recent studies have shown that increases in debt and unemployment in one euro area country affect confidence in the EU in other Member States as well. [...]

c) An imperfect political response

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It has been necessary to develop new instruments as a matter of urgency in the midst of the crisis. Some of those instruments, particularly the financial assistance programmes, are governed by a decision-making mechanism which is not conducive to the development of shared responsibility for policies concerning the future of the euro area. This intergovernmental decision-making process involves endless negotiations, particularly when it comes to issues with redistributive implications, and highlights the differences between the positions of the various Member States. Thus, it runs the risk of a conflict between the legitimate democratic interests of individual countries, without offering sufficient legitimacy at European level in return. [...]

2. Renewing the European project

We must be clear, however: the euro area is an irreversible project, not simply a fixed exchange rate system. This statement is all the more necessary as the recent negotiations concerning Greece have let the evil genie of a country exiting the euro area (even temporarily) out of the bottle. The exit of a member country would inevitably lead economic actors to wonder who would be next, with all the potential destabilising effects that such speculation could entail. [...]

a) Our shared goals

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The Five Presidents’ Report stresses that we need to reinforce the stability of our economies by developing solidarity mechanisms, in particular within the monetary union, while ensuring that governments and economic actors behave responsibly. This is what has been done within the framework of the banking union, and it’s what we must aim to do within the framework of the capital markets union. 

Likewise, greater risk sharing in the fiscal sphere presupposes sufficient economic convergence among participating countries. [...]

Such greater risk sharing also presupposes responsible fiscal policies, which are in the interests of both individual countries and their neighbours. I want to make this clear: we cannot advocate a Europe of solidarity while believing that the economic policies of each euro area country are the business of that country’s parliament alone. The crisis has fully exposed that contradiction.

Second, efficiency gains could be achieved if we were to progressively pool certain resources within the framework of the single market – with such action being justified by economies of scale and scope, network effects and externalities. [...]

Following the lead of Jean-Claude Trichet, I have spoken out in favour of the creation of a finance ministry for the euro area under the oversight of the European Parliament. This ministry could be responsible for preventing economic and fiscal imbalances, managing crises in the euro area and managing the budgetary capacity envisaged by the Five Presidents’ Report, as well as representing euro area governments in international economic and financial institutions.

b) What to do in the short term

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I think it is vital in the short term that the banking union be finalised, with, in particular, an early agreement on a common backstop for the Single Resolution Fund and the progressive implementation of a European deposit insurance scheme, accompanied by reforms uncoupling once and for all the solvency of banks from that of governments. Second, if the euro area is one economy and not the sum of 19, we must have a common growth strategy based on the identification of our structural weaknesses and a collective discussion regarding the reforms to be implemented. The key words must be “ productivity” and “ employment rate”, which are positive-sum games – not “ competitiveness”, which is a zero-sum game. Participating countries will not support euro area growth by competing for their neighbours’ market shares. [...]

Full speech

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