Benoît Coeuré: Is eurozone governance fit for purpose?
Keynote speech by Mr Benoît Coeuré, Member of the Executive Board of the ECB, at a
dinner organised by the Centre for European Reform, London, 30 January 2014.
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I would like to thank Jean-Francois Jamet and Marion Salines for their contributions. I remain solely responsible
for the opinions contained herein.
Ladies and Gentlemen,
I would like first to thank the Centre for European Reform for inviting me here to speak today.
The Centre is an influential think thank both in the UK and elsewhere in Europe, and its
views certainly contribute to shaping the debate on the future of Europe.
Let me start by linking the focus of my speech tonight with a topic which is high on the
agenda here in London - as recently underlined by Mr Osborne. It is the allocation of
competences between the national and the European level. What should Europe be in
charge of? In which areas should Member States remain fully competent? Such questions
are intensely debated on this side of the Channel.
Tonight I would like to look at this issue from a euro area perspective, and more precisely,
from the perspective of the euro area's central bank, the ECB. How has the balance of
competences between the national and the euro area level evolved during the crisis? Have
we now found a more optimal balance which will support the stability of the single currency? I
think this will provide a useful lens through which we can examine tonight's question, namely
"Is eurozone governance fit for purpose?".
A "fitness test" of the euro area governance
The euro area is a unique project - unique because it binds together sovereign and diverse
states; unique because it is trying to foster an ambitious process of economic and political
convergence; and unique because it is the expression of a wider political project.
These specificities mean that there is no ready-made governance model to draw on.
Making the governance of the Economic and Monetary Union (EMU) "fit for purpose" is part
of an evolving "learning by doing" process.
Clearly, the Maastricht model - or at least its implementation by Member States -
proved inadequate to pass the economic "fitness test" when the crisis erupted. Having
monetary policy fully integrated while economic policies, still decentralised, were carried out
with an insufficient European perspective, was lopsided. The past years have shown to what
extent euro area economies and financial systems are interconnected; how decisions by
individual countries can affect the entire currency union; and why national economic policies
need to be seen as "a matter of common concern". In other words, the balance of
competences between the national and the European level was not commensurate with the
requirements of a currency union.
At the same time, I believe that replicating the model of fully-fledged federations in the euro
area would not pass the "fitness test" either, mainly for political reasons. At this stage, a full
integration of economic policies is neither desirable nor feasible. The wide range of
preferences among euro area Member States means that progress on economic and fiscal
union can only be gradual. There will be no sudden leap towards a fully-fledged political
union. And you will never convince the people of Europe that further sovereignty sharing is
needed without first showing them in a convincing way that Europe delivers jobs and stability.
How can we steer clear of the minimalist and maximalist scenarios and be pragmatic in
making the governance framework "fit for purpose"?
In my view, the European level should be allowed to intervene in national policies - or even
be granted new competences - only to the extent that is necessary to account for
interdependencies (economists would say: to internalise cross-border spillovers). Equally,
national economic policies should take into account the existence of potential spillovers to
other members of the currency union.
The approach followed so far implies that the competence for economic policy-making is
increasingly being shared between the European and the national level. This brings
challenges of its own, both in terms of the effectiveness and legitimacy of decision-making.
Despite the inter-linkages, each level should be in a position to deliver on its own mandate.
Correspondingly, citizens should be able to identify who is responsible for what. Here I
believe that EMU still has some way to go before passing the "fitness test".
Let me now review in turn the economic and political dimensions of the "fitness test" of euro
area governance.
Crisis resolution and crisis prevention
During the crisis, the ECB has fully played its role in line with its mandate. The ECB was
faced with interrelated key challenges, namely extreme risk aversion and non-linear
dynamics, deleveraging, fragmentation and a weak economic environment. Like other central
banks around the globe, we have taken decisive measures to support medium-term price
stability and improve the transmission of our monetary policy. This is not the focus of my
talk but I am happy to return to it in the discussion.
In addition, the governance framework for crisis resolution and prevention has been
significantly improved. To the surprise of some, the crisis has shown the strength of the
political commitment to the integrity of the monetary union. If one compares what exists now
and what the framework was six years ago, one can notice the quantum leap that has been
achieved. Let me elaborate.
Regarding crisis resolution, Member States have put in place mutual insurance
mechanisms, most notably the European Stability Mechanism (ESM); sharing financial risks
among sovereign countries is undoubtedly a major political achievement. The ESM was
created in order to provide financial assistance to euro area countries in financial difficulty.
ESM interventions are conditional on Member States first signing a Memorandum of
Understanding containing a programme for the needed reforms or fiscal consolidation to be
implemented in order to restore the financial stability.
The reform of EU governance is also about preventing future crises by remedying market
and government failures. During the crisis, new safeguards have been established for this
purpose:
• The fiscal and economic governance framework of the euro area has been
reinforced through the adoption of a set of EU legal acts (the "six-pack" and the
"two-pack"), as well as the Fiscal Compact. We have thereby achieved a twofold
objective, namely a larger role played by Europe in national policies, as well as an
internalisation of EMU constraints in the domestic frameworks.
• The reform of EU governance also aims to prevent future banking crises and
break the bank-sovereign nexus. The establishment of the single supervisory
mechanism and the adoption of bail-in rules in the Bank Recovery and Resolution
Directive mark significant progress towards preventing excessive risk-taking and
making sure that the taxpayer is last in line to recapitalise banks. But we also need
to have robust resolution arrangements at the European level. The single resolution
mechanism should thus be able to act swiftly and needs ready access to a
resolution fund. I'd be pleased to talk more about this in our discussion.
Overall, significant progress has been achieved:
• We are now starting to see the results of these actions to resolve the crisis.
Sovereign and corporate bond spreads are declining - it's a clear sign that financial
fragmentation has started to recede. This is confirmed by Target2 balances having
decreased by nearly 40% from their July 2012 peak. Rebalancing is also on its way.
Structural budget balances have significantly improved. Crucially, the public
debt-toGDP ratio has started to decrease at euro area level. Moreover, programme
countries have rebalanced their current accounts, not only via demand compression
but increasingly through genuine gains in competitiveness. To be sure, we cannot
afford to be complacent. Debt levels and unemployment are high and unevenly
distributed, and the nascent recovery remains weak and uneven. We also need to
restore trust in the banking sector, which is key to improving lending conditions to
the real economy. In this regard, the comprehensive assessment of euro area banks
will be crucial.
• Moreover, with the new governance framework the Member States have taken key
steps towards internalising economic and financial spillovers within EMU. This has
entailed a shift of the balance of competences upwards: the central level has
been substantially strengthened to make the euro area more stable and resilient.
Fully enforcing the new rules of the game will however be the crucial test. At this stage,
the implementation of the new macroeconomic framework has been somewhat disappointing
in non-programme countries, notably regarding country-specific recommendations. It is more
satisfactory on the fiscal side, but it will be essential that fiscal discipline is also fully enforced
in good times, so that countries have enough fiscal space when the next crisis comes. The
credibility of the new governance framework crucially hinges on the enforcement of our
commitments, today and tomorrow.
To this end, we need to improve effectiveness and legitimacy within the euro area. As I
mentioned before, while economic policy-making is increasingly shared between the
European and the national level, each level should be in a position to deliver on its own
mandate. And citizens should be able to identify who is responsible for what. Only with a
more efficient and legitimate decision-making will we be able to properly enforce the
governance framework; only then will EMU be genuinely "fit for purpose". This brings me to
the political dimension of the "fitness test".
Looking beyond the crisis: a broader political perspective on euro area governance
The Four Presidents' Report identified "political union" as one of the four building blocks of
a genuine EMU. It put forward a number of proposals. Some of the momentum behind the
discussions on these proposals has been lost. It is not up to the ECB to promote them. But
we would welcome policy-makers restarting the discussion and not shying away from
ambitious proposals. I see several possible options to enhance effectiveness and legitimacy:
• First, by strengthening the European dimension of multilateral surveillance. A
full-time Eurogroup President with proper analytical capacity and more autonomous
decision-making powers could be a step in the right direction. This could be
accompanied by stronger accountability towards the European Parliament, in
particular for the implementation of the governance framework. Depending on how
far they are developed, both ideas may require a change to the Treaties.
• Second, it would also be important to strengthen the national ownership of the
reforms prescribed by European procedures and recommendations. European
issues and policies could more often be "invited" into the national debate and into
national parliaments in order to bring them nearer to, and make them better
understood by national citizens. The Commission's Opinion on Member States' draft
budgetary plans, as mandated by the "two pack", is an important instrument in this
respect.
By fostering a public debate and bringing political preferences closer together within the euro
area, the move towards political union may in fact arouse interest in a further deepening
of integration. Policy-makers and citizens may choose to integrate further in the future,
going above and beyond banking union. This shows that the economic and political
dimensions of the "fitness test" are closely intertwined and even mutually reinforcing:
economic integration calls for political integration, and vice versa. Therefore, there is no such
thing as an institutional steady state; the balance of competences is evolving over time.
However, I believe this further sharing of sovereignty will only happen if Europe is able to
deliver tangible progress for its people in terms of stability, growth and job creation. It is the
only way to cut the Gordian knot and overcome the current vicious circle whereby a lack of
integration leads to a poor economic performance and a lack of political support for Europe.
This also applies to the ECB within its price stability mandate: making sure that inflation is
below but close to 2% in the medium term should be our contribution to restoring trust in
Europe.
As a central banker, it is certainly not for me to prescribe what should be the next steps: they
should emerge as the result of a political debate. What I can say is that there would be
economic benefits from further integration. We learnt from the crisis that economic
risk-sharing mechanisms are needed to making the euro area more resilient. However, there
are some preconditions to be fulfilled before progress can be made in this direction. Drawing
on John Rawls' thinking,1 I would argue that Member States will agree on a new "social
contract" only behind the veil of ignorance, not when the house is still on fire. The euro area
thus needs to achieve a higher degree of economic convergence and to address the issue of
the legacy arising from past national policy mistakes. In the meantime, a higher degree of
risk-sharing can be achieved through market-based mechanisms. The completion of the
banking union and a thorough implementation of the Single Market Act II as proposed by
Michel Barnier are of utmost importance in this respect. From the ECB's perspective, further
risk-sharing should first and foremost focus on what could support a smooth functioning of
the single currency.
Further integration within the euro area raises the difficult issue of the relationship with the
"outs", in particular those with a permanent opt-out. The UK has made the sovereign choice
to stay out of the single currency. It has to accept the full implications of this choice when
euro area Member States need to integrate further. Of course, safeguards have to ensure full
consistency with the Single Market, which is the European Union's most valuable
achievement. However, while such safeguards will have a bearing on the design of euro area
integration, they cannot change its direction. And let's have our priorities right: the biggest
threat to the Single Market is not euro area integration: it would be euro area stagnation.
Ladies and Gentlemen,
In 1946, Winston Churchill called for the United States of Europe. This did not pass the
political "fitness test" at the time - and would probably not pass it today either. Subsidiarity
has been and remains an essential principle of building a common Europe. The debates on
the future of EMU governance and the debate on this side of the Channel on a competence
review are not dissimilar in this respect. They boil down to the following crucial questions:
what do we need and want to tackle together, with common policies and a strong centre?
And what can be done nationally, regionally, locally?
However, there is one important element we can still learn from Churchill. No matter how
passionately we debate the right allocation of competences, the right governance, the right
tools and methods, it must be clear that at the heart of all these choices, there is a strong
commitment to building a strong, stable, open and diverse Europe together. I have no
doubt about this commitment in our debate on the future of EMU. And I hope that the debate
in this country in the coming years will confirm that there can be no doubt about this
commitment in Britain.
Many thanks for your attention.