09 October 2013

ECB/Draghi: Europe's pursuit of 'a more perfect Union'

Rather than the phrase 'ever closer union', Draghi said that the agenda facing Europe today was better encapsulated by wording borrowed from the Constitution of the United States: the establishment of a 'more perfect union'.

"By this, I mean that we are ‘perfecting’ something that has already begun – namely, the economic and monetary union that was launched in 1999. Policy-makers are following through the consequences of the decision to create a genuine single market supported by a single currency."

In a robust defence of the euro, Draghi said the single currency was vital for the effective functioning of a single market in the 28-member bloc. "A single market requires a supranational organisation (...) The more difficult question in Europe is what degrees of power must be transferred to the supranational level to support the single market – or put differently, how much sovereignty needs to be shared (...) I argue that a single market necessarily has political implications, in which a partial sharing of individual and national sovereignty can be the best means to preserve that sovereignty."

Draghi also defended new EU fiscal rules, including giving the European Commission the right to inspect national budgets, saying they will make monetary union "more robust”. "These changes do to some extent represent a transfer of powers to the European level. But as with Banking Union, I do not view it as a loss of sovereignty."

From a single currency to a Banking Union

"The implications of the decision to set up a genuine single market are not limited to the creation of the single currency. The single currency itself has consequences, of which the most pressing is Banking Union.

The establishment of a Banking Union has been agreed by Heads of State and Government in Europe and is now being delivered in stages, starting with the single supervisory mechanism. This has been entrusted to the ECB and has recently been approved by the European Parliament. We trust that a single resolution mechanism will enter into force by the beginning of 2015…

In Europe, such Banking Union is even more important than in the US because over two-thirds of firms’ external financing takes place in the form of bank loans. For small and medium-sized enterprises this share is even higher. In the US, by contrast, the role of banks in firms’ external finance is only about one-third or even less. Hence, a Banking Union is crucial also for the euro area real economy.

Certainly, a Banking Union can play a major role in breaking the vicious circle we see in Europe between banks and their sovereigns. But there is also a strong onus on governments to ensure that sovereign debt performs its expected function in the financial system – that is, as a risk-free, safe asset."

The implications for fiscal policies

"It is welcome that governments in the euro area have made significant progress in consolidating their budgets, and hence removing some sovereign risk from the financial system. The primary fiscal deficit for the euro area has fallen from 3.5 per cent of GDP in 2009 to around 0.5 per cent in 2012. In the United States, by comparison, it was around 6 per cent of GDP in 2012.

That said, we need to ensure time consistency. We all know the experience of the first decade of the euro. Fiscal rules enshrined in the Maastricht Treaty were not sufficiently binding; market discipline likewise did not work in an effective way.

For this reason, the ECB has long argued in favour of moving towards more effective rules in the fiscal domain. We are convinced that they are crucial for the stability of the common currency in the longer term. I am therefore encouraged that policy-makers in Europe have been taking significant steps to strengthen the common fiscal rules.

These steps include new ways of dealing with countries that do not comply with recommendations from the European Commission. They include giving the Commission the right to inspect national budgets before they go before national parliaments – a power the US federal government does not have over the states. And they include inserting balanced budget rules into their national constitutions or equivalent. We look forward to a full and transparent implementation of this new regime.

These changes do to some extent represent a transfer of powers to the European level. But as with Banking Union, I do not view it as a loss of sovereignty. Rather, I see the strengthening of the fiscal pillar in a manner that lends credibility to fiscal policies as a way to restore the efficacy of policy: for the Union as a whole, as countries are less affected by spillovers from fiscal difficulties in an integrated financial market; and also for the Member States themselves."

Full speech

Further reporting © Telegraph

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