According to Mr Draghi, two complementary responses are needed. Firstly, the economies of the euro area need to become more resilient through sound public finances and decisive reforms of their economic structures." Fully applying the strengthened economic governance framework will support this objective", he believes. "And secondly we need to move from a system of rules for national economic policy making to a system of further sovereignty sharing within common institutions to strengthen our economic policy governance. A common rule is only as strong as the common institution that can enforce it", he said.
For several quarters now, inflation in the euro area has been on a continuous downward trend. At the same time, in January 2015 market participants were expecting inflation to return to levels closer to our policy aim only over a horizon which stretched well beyond any meaningful definition of medium term. In an environment of weak economic recovery and subdued money and credit developments, risks were increasing that falling inflation expectations would feed back into weakening actual inflation. Such a self-reinforcing process could have posed severe downside risks to our price stability objective.
Against this background, we judged that the degree of monetary accommodation that had been introduced in 2014 was insufficient. A more forceful monetary policy response became necessary. With key interest rates at their lower bound, the Governing Council of the ECB considered outright purchases of public securities to be the only remaining instrument which could be activated on a sufficient scale to broaden and strengthen the measures already in place. Thus, we decided in January to launch an expanded asset purchase programme.
Under the programme the Eurosystem will continue its purchases of simple and transparent asset-backed securities and of covered bonds. In addition, we will start purchasing on the secondary market investment-grade securities issued by euro area governments, public agencies and European institutions. The purchases will start in March. The combined purchases of public and private sector securities will amount to €60 billion per month. The programme is intended to last until end-September 2016. In any case, it will last until the Governing Council sees a sustained adjustment in the path of inflation which is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term.
The future of EMU governance
The past few years have been challenging for the conduct of our monetary policy in view of the environment of financial fragmentation, which brings me to the topic of the foundation of our economic and monetary union. At the beginning of EMU stood a clear commitment by Member States to converge economically and institutionally. Progress has been significant when it comes to common institutions. We now have not only one currency and one central bank, but also one supervisor, one resolution authority and one crisis-management mechanism. These institutions are built on the principles of shared sovereignty and of strong enforcement of common rules. Together, these institutions clearly set the euro area apart from the arrangements that were in place prior to the start of EMU.
But we have not yet reached the stage of a genuine EMU. Economic convergence has not been as sustainable as it was hoped for at the outset. This still puts at risk the long-term success of monetary union when faced with an important shock. In my view, there are two complementary responses to address this situation: First, the economies of euro area Member States need to become more resilient. This requires sound public finances and, in particular at the current juncture, decisive reforms of their economic structures. Fully applying the strengthened economic governance framework will support this objective. Second, in the medium to longer term, we need to move from a system of rules and guidelines for national economic policy making to a system of further sovereignty sharing within common institutions so as to strengthen our economic policy governance. A common rule is only as strong as the common institution that can enforce it. The discussions on the new Four Presidents’ Report will certainly provide a good opportunity to think further on these matters, and I am looking forward to your views in the upcoming Berès report on the economic governance framework.