Jens Weidmann: The euro - political project and prosperity promise
Introductory statement by Dr Jens Weidmann, President of the Deutsche Bundesbank, at the
Rencontres Économiques d'Aix-en-Provence, Aix-en-Provence, 7 July 2013.
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1 Introduction
Ms Boone, Mr Beytout, Mr Lahoud, Mr Papantoniou, Mr Reynders, Mr Védrine
Ladies and gentlemen
It is a great pleasure for me to be here today. I am very happy to be back here in
Aix-enProvence, a place which brings back so many fond memories. In a way, one could say that I
have come full circle: 25 years ago, I came to Aix as a student eager to learn and discuss
economics and Europe - and, of course, to enjoy student life in this beautiful Provençal city.
Today, I intend to do the same. Unfortunately, this pertains only to the first part.
2 The euro - political project and prosperity promise
Whenever the topic of conversation turns to economics and Europe, the euro normally takes
centre stage - today more than ever. But it is worth remembering that the euro was also a
political project from the very outset. Back in 1949, the French economist Jacques Rueff
declared that money would pave the way for European integration: "L'Europe se fera par la
monnaie ou ne se fera pas."
50 years later, Jacques Rueff's vision took shape. But the integration brought about by the
economic and monetary union was by construction an asymmetric one. Monetary policy was
united. But fiscal and structural policies remained matters of national responsibility, albeit
subject to coordination rules that sought to address the deficit bias inherent in this
institutional setting.
This was in keeping with the principle of subsidiarity as enshrined in the European Treaties.
It was also supposed to be in keeping with the principle of liability, as spelled out in the
no-bail-out clause, which sought to complement the coordination rules by fostering market
discipline with regard to fiscal policy. And it was in keeping with the primacy of monetary
stability by virtue of an independent European System of Central Banks and the prohibition of
monetary financing.
Together with the rules laid down in the Stability and Growth Pact, these precautions were
designed to contain the tensions inherent in a framework that combines a single monetary
policy with 17 national economic policies.
Besides being designed to promote stability, the euro promised to foster prosperity as well.
Hopes were high that the euro would set in motion a process of real convergence. It was
expected that governments would have no choice but to implement structural reforms and
improve their supply side, since stimulating demand would no longer be an option. Fiscal
policy was supposed to be bound by the rules of the Stability and Growth Pact and by the
disciplining effect of the financial markets; monetary policy, meanwhile, would no longer be
available to national policymakers at all.
We now know that things did not quite work out as expected. That poses a fundamental
question: do we need to shift economic policies to the European level to make monetary
union viable? Or will it suffice to amend the existing framework?
In my remarks, I wish to argue that both avenues can in principle lead to a stable framework.
The changes required to amend the current framework are by no means trivial. But it is my
impression that, at the current juncture, they might be more feasible than giving up national
sovereignty in fiscal and economic matters.
3 A stable framework for a prosperous monetary union
The crisis can be read simultaneously as a sovereign debt crisis, a balance of payments
crisis and a financial crisis. But in my view, there is one basic economic principle which goes
a long way towards explaining it: people respond to incentives.
And in the case of Europe, implicit guarantees for banks and sovereigns caused
shareholders, investors, governments and voters to ignore, or worry less about risk.
Underestimated contagion effects between countries exacerbated these effects. In the end,
the balance between liability and control - which is essential for any market economy - had
got out of kilter.
This, for me, largely explains the unsustainable developments in the run-up to the crisis. And
this is what needs to be changed for the euro area to regain its footing.
In terms of the implicit guarantee given for sovereigns, a genuine fiscal union would be a
path towards establishing a framework which balances liability and control. In this scenario,
control and intervention rights would be shifted to the European level. If this prerequisite
were fulfilled, a greater mutualisation of liabilities would become feasible - and may be
justified.
But it seems to me that giving up national sovereignty in fiscal matters does not enjoy a
majority in Europe at this juncture - neither among politicians nor among the general public
in the member states. President Hollande's recent response to the European Commission's
recommendations for reform is a case in point: "Elle n'a pas à nous dicter ce que nous
devons faire."
And mutualising debt without mutualising control would exacerbate the tensions inherent in
EMU's framework rather than eliminate them. It therefore would not resolve Europe's woes,
but only make matters worse. It would not, in particular, preserve the currency union as a
stability union.
So for me, the only feasible way forward is to strengthen the framework laid down in the
European Treaties. This implies stiffening the fiscal rules which were stretched and ignored
too often in the past, with Germany being one of the culprits.
The new Stability and Growth Pact is a step in the right direction. But the mere existence of
these rules does not suffice. We need to actually apply them. Softening the rules would be a
step backwards. The European Commission recently suggested taking public investment out
of the deficit calculation. In my view, this only serves to make the procedure arbitrary and
intransparent.
In addition to stronger rules, we need to make sure that in a system of national control and
national responsibility, sovereign default is possible without bringing down the financial
system. Only then will we really do away with the implicit guarantee for sovereigns.
To achieve this, we have to sever the excessively close links between banks and sovereigns.
Currently, European banks hold too many of their own governments' bonds. This is because
banks do not have to hold any capital against their government debt, as the risk weight
assigned to sovereign bonds is zero. To counteract excessive investment in sovereign
bonds, we need to change the capital rules for these bonds to make sure they are
adequately risk-weighted; and we need limits for banks' exposures to sovereigns, as is
already the case for private creditors. Only then will banks be able to cope with the
repercussions of sovereign default.
Getting to grips with the implicit guarantee for sovereigns would be a big step towards
eliminating the inherent tensions in the monetary union's structure. Removing the implicit
guarantee for banks would be another one.
To make that happen, we have to ensure the resolvability of banks. Defining a clear
hierarchy of creditors is crucial. Shareholders and creditors will have to be first in line when it
comes to bearing banks' losses - instead of taxpayers. And to further strengthen market
discipline, the establishment of a single supervisory mechanism for systemically important
banks as well as a single resolution mechanism will be an important step forward. In this
regard, a common resolution regime will have to ensure that banks without a viable business
model can exit the market in an orderly fashion.
Such a regime is crucial not only for financial stability, but for sustainable growth as well. A
functioning resolution regime strengthens incentives for effective credit monitoring and
moderates banks' risk appetites. In so doing, it enhances the allocation of capital and
reduces the risk of a bubble emerging.
Better still would be if banks didn't reach the point of having to be wound down in the first
place. In this regard, higher capital requirements are a big part of the solution - the single
supervisory mechanism is another.
4 The role of monetary policy
These are necessary steps that will put the euro area back on the path to prosperity. Finally,
please allow me to make a few short remarks on the role of monetary policy during the crisis.
Monetary policy has already done a lot to absorb the economic consequences of the crisis,
but it cannot solve the crisis. This is the consensus of the Governing Council. The crisis has
laid bare structural shortcomings. As such they require structural solutions.
"Structural reforms may hurt a few vested interests, but they would clearly strengthen the
effectiveness, competitiveness and, yes, also the fairness of our economies." Those are
Mario Draghi's words, not mine. I agree, however.
The best contribution a central bank can make to a lasting resolution of the crisis is to fulfil its
mandate: that of maintaining price stability. And this is what Jacques Rueff actually meant
when he made that famous statement in 1949. As David Marsh has pointed out, it was a
declaration of support for common principles of monetary stability rather than an early
advocacy of a single currency. We should not jeopardise now what we have fought so long to
achieve.
5 Conclusion
Ladies and gentlemen, let me conclude.
Monetary union has always been both a political project and a prosperity promise. To fully
unleash the common currency's potential, efforts are needed on two fronts: structural reforms
as well as the abolition of implicit guarantees for banks and sovereigns.
But I did not come here to preach; I came here to discuss, to listen, and to learn. So without
further ado, I would like to hand over to our moderator, Nicolas Beytout.