12 August 2012

VP Rehn: How we'll build European Monetary Union 2.0

On June 29, eurozone leaders committed to do what is necessary to ensure financial stability through an effective and flexible use of the existing instruments. These instruments, which allow intervention in bond markets when necessary, must follow a request by a Member State and would be subject to strict conditionality. 

To ensure that such interventions help to bring down bond yields in a lasting way, they will be available only for Member States that pursue sound budgetary policies, adopt structural reforms for growth and employment, and address macro-economic imbalances. Conditions are set via the established political processes between national and European-level leaders. And the European Commission stands ready to carry out the surveillance of strict and effective conditionality as needed.

European Central Bank President Mario Draghi has made it clear that addressing fears of the euro's undoing would fall squarely within the ECB's mandate. While fully respecting the ECB's independence, I welcome its readiness to consider further non-standard measures to repair monetary-policy transmission. The ECB will remain an anchor of stability throughout the crisis.

At the same time, Europe is committed to building a genuine economic union to complement and strengthen our existing monetary union. A specific and time-bound road-map for achieving this will be in place by the end of the year. 

In September, the European Commission will deliver its proposal for a single supervisory mechanism for banks, which will involve the ECB. Once this is in place, the European Stability Mechanism will be given the power to recapitalise banks directly, so the funds it provides for this purpose will no longer add to the debt burden of countries already under intense market pressure.

While building "Economic and Monetary Union 2.0", leaders have also agreed to explore the conditions under which it would be rational for European countries to issue debt jointly. The guiding principle has to be that a further mutualisation of economic risk will require a parallel deepening of integration in budgetary decision-making. 

Translating this principle into concrete action will not be easy. The choices are of fundamental importance to the future of Europe. As such, all efforts must be made to ensure that they are taken in a way that European citizens consider legitimate. The sovereign debt crisis has both underlined the need and created the conditions for Europe to rebuild and reinforce its economic and monetary union. Thus the eurozone will continue to defy its detractors.

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