24 April 2013

ECB/Constâncio: Presentation of the ECB Annual Report 2012 to the ECON Committee

Constâncio gave an overview of the economic and monetary developments in 2012, set out ECB's assessment of economic policies and governance, and commented on future steps towards establishing a banking union.

The Governing Council remains strongly committed to its price stability mandate. Long-term inflation expectations have remained firmly anchored in line with price stability. Over the course of 2012 decisive measures were taken to support the transmission of the historically low key interest rates to the real economy. The three-year LTROs launched at the turn of the year have prevented that funding stress in interbank money markets led to a disorderly unwinding of bank balance sheets, which could have had serious consequences for price stability.

The structural reforms should be ambitious, broad-ranging and with long-lasting effects. They should address product markets, network industries, labour markets, and the modernisation of public administration. To support employment, wage-setting should become flexible and aligned with productivity. These reforms will help to regain competitiveness, increase employment, set the foundations for sustainable growth and support the return of confidence. It is worth noting that several stressed countries already did significant reforms which are reflected in the competitiveness gains since 2008 in terms of relative unit labour costs (UCLs). In fact, since then and in relation to other euro area members, Ireland reduced its unit labour costs by 19.4 per cent, Spain by 9.5 per cent, Greece by 8.9 per cent Portugal by 6.6 per centand Italy by just 0.1 per cent. The reductions achieved against their more significant 36 trading partners were even higher and, more importantly, the gains since 2008 sizeably reduced the cumulative evolution of their ULCs since 1999. The significant losses of competitiveness from the inception of the euro and the beginning of the crisis in 2008 have been meanwhile corrected. In fact, relatively to the other euro area members from 1999 to the end of last year Greece reduced its ULCs by 5.8 per cent and Portugal by 2.4 per cent, whereas Spain increased theirs by only 2.9 per cent and Ireland by 1.6 per cent.

Another priority is the establishment of a single resolution mechanism. This is a necessary complement to the SSM and fundamental to the creation of a banking union. I see three key features of a single resolution mechanism which I want to emphasise today: a set of instruments, an authority and a fund.

First, the single resolution mechanism requires a comprehensive set of enforceable resolution tools and powers. The Bank Recovery and Resolution Directive provides a harmonised resolution framework for Europe and a clear tool-kit of powers and instruments in all Member States. It should include provisions on bail-in and introduce depositor preference. This will contribute to predictability, avoid disruption to essential banking services and shield taxpayers from excessive exposure. The urgent adoption and implementation of this Directive is therefore of paramount importance.

Second, the single resolution mechanism requires a strong authority at its centre. Mere coordination between national authorities is not sufficient for cross-border resolution in crises. This single resolution authority should have independent decision-making powers that would enable prompt and decisive action. It should ensure that we re-shift the balance between bail-outs and bail-ins, where the private sector is held responsible for its risk-taking decisions. Those that benefit from the gains should also pay for the losses. The single resolution authority should ensure a resolution strategy that takes account of all relevant factors, notably financial stability, the impact on the real economy and a least cost principle for the taxpayer.

To do this, the single resolution authority should ensure costs are first borne by shareholders and creditors. However this may not be sufficient, therefore the single resolution authority should have a privately-funded European resolution fund at its disposal. Only then, and as a last resort, should it have access to a temporary and fiscally neutral public backstop, the contributions to which should be paid by the private sector either via ex post levies or, more normally, as a result of the reprivatisation of the intermediary institutions (e.g. bridge banks) or other good assets resulting from the resolution process.

Progress in these elements of a future banking union is very important in the present economic environment of low growth. Part of the European problem has to do with the situation of the banking sector: pressed for capital, intending to deleverage and risk averse in managing credit risk. Consequently, credit is being contained although it is virtually impossible to disentangle the contribution of supply restrictions versus weak demand in explaining the average decline of credit to the economy.

Full speech

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