Benoît Coeuré: Investing in Europe - towards a new convergence
process
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
at the Panel "The big rethink for a stronger Europe", The Economist Roundtable with the
Government of Greece, Athens, 9 July 2014.
* * *
I would like to thank Lucas Guttenberg, Jean-Francois Jamet and Marion Salines for their contributions. I remain
solely responsible for the opinions contained herein.
Summary
Economic and Monetary Union (EMU) is a political triathlon. It requires resilience and resolve
to perform well at all times in the three disciplines of a currency union: fiscal policy, economic
policy and financial policy. EMU is a team effort. Only if every participant performs well can
the euro area team be strong. This is the most important lesson from the crisis.
The European economy is undergoing a moderate recovery, but complacency would be
unwarranted. To really overcome the crisis, there are some remaining major challenges still
to be faced. The euro area is not in a financial crisis anymore, but it must still contend with
high debt, low growth and unacceptably high unemployment. These are reason enough to
remain alert and continue acting. In recent years, economic policy-making rightfully focused
on re-establishing the most important necessary condition for growth: stability. For
companies to invest, for firms to hire, for households to consume, a stable economic
environment is tantamount.
There are three relevant dimensions of economic stability: price stability, financial stability
and macroeconomic stability, including the health of public finances. In all these areas, we
have made substantial progress in recent years. During the crisis, the ECB took all
appropriate measures to ensure that price stability provided an anchor in an uncertain and
volatile economic environment. As for financial stability, the establishment of the European
Stability Mechanism and the launch of banking union, with its Single Supervisory Mechanism
and Single Resolution Mechanism, have been milestones in this respect. As a third
dimension, the crisis has shown us the kind of existential threat to monetary union that can
be brought about by the build-up of excessive imbalances, i.e. by the lack of fiscal and
macroeconomic stability. New growth will not be generated by new debt. Sound fiscal
policies are essential for growing out of debt. Therefore, the existing rules should be applied
in a credible manner.
That said, we cannot claim "mission accomplished". What has been achieved so far is not
enough. The answer to the remaining challenges could take the form of a "convergence
process 2.0", which should have an agreed timeline and milestones. But convergence can
only be sustainable if it is associated with a commensurate deepening of integration, if it is a
race towards best practice institutions and policies rather than towards mere nominal
outcomes. In this context, structural reforms, if properly designed, lead to greater prosperity
in each country and, at the same time, ensure greater resilience of EMU as a whole, thereby
contributing to economic and social stability. Growth and stability are therefore mutually
reinforcing.
The convergence process should consist of two legs: on the one hand, it should underpin the
convergence of economic policies and structures at the national level. On the other hand, it
should facilitate joint action.
At the national level, convergence implies that euro area governments need to step up
structural reforms, in particular those which have the greatest efficiency gains given the
relative distance to best practices. And policy-makers should pay due attention to ensure that
the burden of the adjustment effort is shared fairly.
The convergence in national structures could be complemented by joint action at the
European level to increase investment and by the transfer of certain budgetary
responsibilities to the European level with a view to strengthening risk-sharing within the
currency union. But joint action can only occur once trust has been restored across countries
and within countries, and the convergence process has advanced successfully. The level
and the form of budgetary responsibilities, and how they are matched by appropriate
democratic arrangements, should emanate from the political process.
The biggest threat to the Single Market is not euro area integration: it would be euro area
stagnation. The challenge of making the EMU work is far from over. Let's get ready for the
next stage of the race.
Intro
Ladies and gentlemen,
Let me first of all thank The Economist for inviting me to this distinguished panel.
Almost exactly ten years ago, the Olympic triathlon took place here in Vouliagmeni. On race
day, the weather was as hot and as dry as it is today. The athletes needed to have two
important attributes in order to be able to compete in a triathlon in these conditions: resilience
to withstand the heat and commitment to endure all three disciplines with equal passion.
Economic and Monetary Union (EMU) is a political triathlon. It requires resilience when the
heat is on and it requires commitment and resolve for participants to perform well at all times
in the three policy disciplines that mark a currency union: fiscal policy, economic policy and
financial policy. But there is one important difference with a triathlon: EMU is a team effort.
Only if every participant performs well can the euro area team be strong. This is the most
important lesson from the crisis.
Today, I want to discuss what this means in terms of the policy efforts that could be part of
- as the panel title calls it - "the big rethink for a stronger Europe". I will start with an
analysis of the outstanding challenges - or the heat - that the euro area still faces. I will
then outline what has already been achieved to bring stability and confidence back to the
euro area. And third, I will argue that we need a credible long-term path towards more
convergence and stronger resilience in the euro area so as to foster durable growth and
ensure that the return of confidence is long-lasting; this is about the commitment to perform
right up to the end. I refer to this long-term policy effort - not to qualify for participation in
EMU, but to maintain successful participation in EMU - as "convergence process 2.0", as I
will explain in a moment.
The state of the euro area
The European economy is undergoing a moderate recovery, but complacency would be
unwarranted. To really overcome the crisis, there are some remaining major challenges still
to be faced.
First, the euro area's debt has stabilised, but remains at high levels.1
Second, euro area unemployment is still high and the youth are suffering disproportionately.2
Finally, growth is only resuming at a slow pace.3 Investment has been too low in Europe over
the last 15 years, and the crisis has exacerbated this trend. At the same time, total factor
productivity, which forms the basis of long-term growth, has also been disappointing.4
If this trend continues over the long term, the euro area will not generate enough wealth to
sustain the standard of living of its citizens and to ensure the sustainability of its social
model, which is a defining feature of its identity.
We sometimes ask ourselves how to keep the reform momentum going without the pressure
of the financial crisis.5 We would like to believe that what has been achieved since 2010 to
strengthen EMU is enough to make it strong and sustainable and we can therefore claim
"mission accomplished". But the challenges I have just outlined provide enough of an
answer. What has been achieved so far is not enough. The euro area is not in a financial
crisis anymore, but it must still contend with high debt, low growth and unacceptably high
unemployment. These are reason enough to remain alert and continue acting.
Stability - a precondition for growth
For companies to invest, for firms to hire, for households to consume, a stable economic
environment is tantamount. If uncertainty reigns, economic activity suffers. In my view, there
are three relevant dimensions of economic stability: price stability, financial stability and
macroeconomic stability, including the health of public finances. In all these areas, we have
made substantial progress in recent years.
During the crisis, the ECB has taken all appropriate measures to ensure that price stability
provided an anchor in an uncertain and volatile economic environment. Consistent with this
principle, our recent decisions have aimed at addressing the risk of too long a period of low
inflation and at ensuring that inflation expectations remain firmly anchored.
As for financial stability, the crisis has shown us how the functioning of an economy
becomes impaired without a well-functioning, robust financial system. This requires striking
the right balance between insuring against crises, curbing risk-taking behaviour and
mitigating moral hazard with a strong incentive framework. The establishment of the
European Stability Mechanism and the launch of banking union, with its Single Supervisory
Mechanism and Single Resolution Mechanism, have been milestones in this respect. The
stabilisation and ongoing repair of the Greek banking system is another example.
As a third dimension, the crisis has shown us the kind of existential threat to monetary union
that can be brought about by the build-up of excessive imbalances, i.e. by the lack of fiscal
and macroeconomic stability. The lesson drawn from this existential threat was that there
was a need to reform economic governance. We should be very careful now not to roll back
this achievement, in particular in the fiscal domain. New growth will not be generated by new
debt. On the contrary: sound fiscal policies are essential for growing out of debt. Therefore,
the existing rules should be applied, and they should not be stretched to a point where they
would lose their credibility. There is built-in flexibility in the Stability and Growth Pact to
account for the cost of major structural reforms - but it cannot be based on empty promises.
The sequencing should be clear. First, reforms need to be adopted and implemented. Then,
the cost of such a reform, independently assessed, could be taken into account under the
Stability and Growth Pact, with due attention to the limited fiscal space provided by the high
debt levels.
Economic stability is a necessary condition for growth, but is not sufficient alone. For our
economies to grow out of high debt and unemployment, and thereby ensure social stability,
we need to do more.
Racing to the top: "convergence process 2.0"
The challenges I outlined a minute ago call for an answer that goes beyond the necessary
application of the existing rules of EMU. An answer that not only fosters stability and
confidence today, but also in the future. An answer that gives EMU the institutional shape it
needs to be a successful project in the long run. This answer could in my view take the form
of what I call "convergence process 2.0", which should have an agreed timeline and
milestones.
To run the political triathlon of EMU and perform well in all three disciplines, there needs to
be a convergence of economic policies and structures. Moreover, joint action is of the
essence.
Let me be clear on what I mean by convergence. The crisis has shown the fragility of the
convergence of economic outcomes; it can unravel quickly in the face of exogenous shocks.
Convergence can only be sustainable if it is associated with a commensurate deepening of
integration, if it is a race towards best practice institutions and policies rather than towards
mere nominal outcomes. In this context, structural reforms, if properly designed, lead to
greater prosperity in each country and, at the same time, ensure greater resilience of EMU
as a whole, thereby contributing to economic and social stability. Growth and stability are
therefore mutually reinforcing.
With regard to convergence in economic structures and policies, the starting point has to
be decisive action at national level. Euro area governments need to step up structural
reforms, in particular those which have the greatest efficiency gains given the relative
distance to best practices.6 Policy-makers should pay due attention to ensure that the burden
of the adjustment effort is shared fairly. The perception of fairness of reforms in the national
context is a key ingredient in their success. Fighting tax evasion, rent seeking and corruption
as well as increasing transparency are key examples.
These efforts at the national level should be complemented by structural reforms at the
European level, aimed at deepening the Single Market, the cement that holds all our
economies together. This is particularly true of the Single Market for capital, where a lot can
still be done to enhance both risk-sharing and allocative efficiency.7
Structural reforms at the national level could also go beyond the country-specific perspective
in the areas of direct relevance for the smooth functioning of EMU. In these areas,
convergence could be embedded in a binding European effort, based on benchmarks to be
met by all euro area Member States. This process would be a race to the top and would
close the gap to the frontier in terms of competitiveness and resilience.
For this process to be fully effective and legitimate, it would have to entail the gradual pooling
of sovereignty in these policy areas and be based on the Community method with due
involvement of the European Parliament.
The convergence in national structures could be complemented by joint action at the
European level in two respects.
Complementing regulatory initiatives, there could be a joint European effort to increase
investment levels by better channelling private savings to investment and by coordinating
available public investment programmes. Beyond this, one could envisage joint European
investment in public goods such as network industries and R&D, as a way to bolster
Europe's growth potential and to even out drops in public investment in economies hit by
shocks. Yet, this should be achieved by prioritising spending and should not undermine
efforts that remain necessary to bring down debt levels.
In the longer term, the convergence process could culminate in the transfer of certain
budgetary responsibilities to the European level with a view to strengthening risk-sharing
within the currency union. But let me add an important note of caution. This can only occur
once trust has been restored across countries and within countries, i.e. after growth has
resumed, unemployment and inequalities have receded, and economies have sufficiently
converged. What we are talking about is a new social contract among European countries.
This can only be agreed under the veil of ignorance,8 i.e. under the expectation that
participating economies, in their diversity, have comparable strengths and weaknesses. And
that is why such a new social contract can only happen at the end of a new convergence
process.
As to which level which budgetary responsibilities are allocated, and how they are matched
by appropriate democratic arrangements, I believe this is ultimately a political decision. It
should emanate from a political process, and I note that other federations with more
developed forms of political union such as Switzerland or the United States have found very
different answers to this question.
Further integration within the euro area raises the difficult issue of the relationship with the
"outs". Adequate 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. The
biggest threat to the Single Market is not euro area integration: it would be euro area
stagnation.9
Conclusion
Ladies and gentlemen,
The triathlon competitions here in Vouliagmeni ended a decade ago. The challenge of
making EMU work is far from over. In fact, we are now just out of the water. Let's get ready
for the bike race and not forget about the running that will come later.
Many thanks for your attention, and I am now looking forward to our debate.