Yves Mersch: Challenges for completing Europe's economic and
monetary union
Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank,
at the MNI Connect event, Singapore, 13 October 2015.
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Over the past few months, Europe has faced two exceptional challenges. First, there was the
new adjustment programme for Greece. And second, there has been the large influx of
refugees, a challenge that is very far from the competences of the European Central Bank
(ECB). Though very different in nature, these two events offer a common lesson for future
challenges that we will collectively face: that Europe is strong only when it acts on the basis
of solidarity and cooperation.
I would like to talk about two further topics of importance today: first, the ECB's assessment
of recent economic developments and their implications for our monetary policy stance; and
second, the necessity for completing Europe's economic and monetary union. Over the
summer, industrial production and other indicators of economic activity in the euro area have
shown signs of resilience. Yet at the same time, the macroeconomic environment has
become more challenging. The ECB's latest macroeconomic projections indicate a weaker
economic recovery and a slower increase in inflation rates than was expected earlier in the
year. Inflation will remain close to zero in the very near term, before rising again towards the
end of the year. It will take somewhat longer than previously anticipated for inflation to return
to a rate that we consider sufficiently close to 2% and stabilise at that rate.
Three main causes underpin these developments: first, decelerating growth in emerging
market economies; second, a stronger euro; and third, the fall in oil prices and commodity
prices more generally. The consequences are renewed downside risks to the outlook for
growth and inflation.
It is too early to judge whether these factors will cause lasting changes to the trajectory that
the ECB expected inflation to follow. In particular, more time is needed to determine whether
the loss of growth momentum in emerging markets is temporary or permanent in nature and
to assess what is driving the fall in commodity prices and to what extent falling oil prices will
have second round effects. As always, we will be closely monitoring all relevant incoming
information and its potential impact on price stability.
The monetary policy measures that we have in place - including the TLTROs or 'targeted
longer-term refinancing operations' - continue to have a favourable impact on the cost and
availability of credit for firms and households. Thus far, despite the recent surge in financial
volatility, the measures have prevented a measurable tightening in financial conditions for the
real economy. The sustained decline in the cost of borrowing is strengthening domestic
demand, supporting durable goods consumption and stimulating investment, particularly by
small and medium-sized businesses. This is making the economy of the euro area more
resistant to external shocks.
In the event that the downwards risks I have mentioned weaken the inflation outlook over the
medium term more fundamentally than we currently project, we would not hesitate to act.
Should more monetary policy impulse become necessary. The ECB is determined to use all
available instruments to achieve its mandate over the medium term.
As for potential risks to financial stability, we do not see them materialising at present but we
will naturally be monitoring them closely. Over the past two years, national authorities across
Europe have been active in developing and implementing macroprudential policy measures
but their effectiveness still has to be tested. Before addressing my second topic, let me
mention Greece again. The comprehensive agreement that has been reached involved a
long and complication discussion. But if, as we all hope, the new programme is completely
implemented, it will put Greece in a strong position to grow again and to reap the full benefits
of participating in our common currency. The negotiations over the summer once again
confirmed that Europe's institutional framework is not yet commensurate with the
requirements of sharing a single currency. A more complete union is necessary.
From the ECB's perspective, two elements are of particular importance. First, despite the
best efforts of everyone involved, the crisis has revealed the need for a political centre to
economic and monetary union. That centre must be able to take the relevant fiscal, economic
and financial decisions for the euro area as a whole in a swift and transparent manner with
full democratic legitimacy and a clear set of responsibilities determined by the legislators.
This requires a move from rules-based coordination to sharing of sovereignty within common
institutions. One proposal that now needs to be developed further in terms of scope, function,
and democratic accountability is a euro area treasury.
But - and this is the second important element from the ECB's perspective - we should also
go further with our current policies. It is clear that Europe's economic and monetary union will
need to strengthen its tools to manage and prevent the build-up of fiscal, financial and other
macroeconomic risks. Recent reforms include strengthening the framework of economic
governance and establishing the European Stability Mechanism, the Single Supervisory
Mechanism and the Single Resolution Mechanism. These are important first steps in
improving our toolkit for crisis prevention and crisis management, but further progress is
needed.
In the nearer term, we should move towards completing Europe's banking union through a
common backstop for the Single Resolution Fund as well as a roadmap towards a European
deposit insurance scheme. Both are essential for creating a truly single banking system to
mirror our single currency. Both are also crucial for underpinning the credibility of the banking
union and achieving its initial promise of breaking the bank-sovereign nexus, making the
financial system more resilient and protecting taxpayers' interests. In addition, we must look
beyond the banking sector and make progress in developing a capital markets union to
enhance further the scope for cross-border private risk-sharing.
It is also essential to prevent imbalances from developing into future crises. We need a new
convergence process based on the capacity of our economies to withstand shocks and
recover from them quickly. This implies not only establishing a more robust financial system;
it also requires stronger governance of structural reforms and tighter control of national fiscal
policies. To ensure that Member States can adjust to economic shocks, whatever their size,
once we achieve greater convergence we will also need to add a layer of fiscal stabilisation
at the European level.
Taken together, these steps towards completing Europe's economic and monetary union
would help the euro area not only to survive, but also to thrive and prosper.