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The European Central Bank president on Friday backed calls from France’s president Emmanuel Macron for more economic and monetary integration, offering the bank’s support for his vision of a stronger backstop for failing banks and a fund that could be drawn upon to mitigate a downturn. Mr Macron has run up against reluctance from other member states, notably Germany, to sign up to more integration. [...]
German politicians fear some of Mr Macron’s idea would expose the eurozone’s largest economy to losses originating in other member states.
But Mr Draghi said that under the right circumstances sharing risk between member states could also help risk reduction. He said publicly funded “backstops” could encourage businesses and households to invest across the region, not just domestically.
“The crisis showed clearly the potential of some euro area economies to become trapped in bad equilibria. And plainly, as long as this risk exists, it will act as a deterrent to cross-border integration, especially for retail banks that cannot cut and run as soon as a recession hits,” the ECB president said.
“Put simply, we will not be able to foster private risk-sharing in our union if crises can call its very integrity into question.”
Concerns in Paris are mounting that eurozone leaders will fail to make meaningful progress towards banking and fiscal union at a meeting in Brussels in late June.
France’s president, speaking in the German border town of Aachen on Thursday, made an appeal for Berlin to join his plans for “a stronger eurozone, more deeply integrated, with its own budget allowing for investments and convergence”.
Mr Draghi said on Friday that sharing risks between member states would save money in the longer run, instilling confidence in the financial system’s capacity to contain turmoil.
“Public risk-sharing through backstops [for failing banks] helps reduce risks across the system by containing market panics when a crisis hits. And a strong resolution framework ensures that, when bank failures do happen, very little public risk-sharing is actually needed as the costs are fully borne by the private sector,” Mr Draghi said.
Mr Draghi added that “creating a properly designed European deposit insurance scheme” would also lower the odds of bank runs.
While European leaders may make some progress in strengthening the eurozone’s Single Resolution Fund, a mechanism to allow banks to fail without causing wider market fallout, the June meeting is not expected to make much progress towards a common deposit insurance scheme for the euro area.
On creating a rainy-day fund that member states could use, Mr Draghi said: “We need an additional fiscal instrument to maintain convergence during large shocks, without having to over-burden monetary policy. Its aim would be to provide an extra layer of stabilisation, thereby reinforcing confidence in national policies.”
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