Jürgen Stark: Hearing at the Committee on Economic and Monetary
Affairs of the European Parliament
Introductory statement by Mr Jürgen Stark, Member of the Executive Board of the European
Central Bank, at a hearing at the Committee on Economic and Monetary Affairs of the
European Parliament, Brussels, 17 October 2011.
* * *
Dear Madam Chair,
Dear Honourable Members,
It is a pleasure to be here today and share with you my thoughts on Economic Governance.
This public hearing comes at a right time: important decisions have been taken, but major
reforms are still crucially needed. I will therefore address, in turn, the three suggested issues
for discussion: the implementation of the economic governance package, the longer term
reforms in the economic governance framework and the question of Eurobonds.
1. Follow-up and implementation of the economic governance package
I would like to start by congratulating this committee on the passage of the six pack. The
adoption of a reinforced economic governance framework shows the ability of EU decision
makers to address some of the shortcomings of the existing rules which came to light during
the crisis. In the current situation of market turmoil and uncertainty, it sends a signal of
confidence to EU citizens and financial markets.
The final text provides for a stronger framework than initially proposed by the Commission.
And this is largely thanks to Parliament. Once again this committee has used its powers to
instil a more European and supranational approach in economic governance, which is
incidentally very much in line with the ECB position, and I would like to thank you for that.
As you know, I have a strong attachment - to say the least - to a set of binding,
quasiautomatic fiscal rules which need to underpin the sharing of a single currency. The "new"
Stability and Growth Pact all SGP III - if it can be called this way - should strengthen fiscal
surveillance and enforcement of fiscal discipline in euro area countries. Equally important,
reinforced the statistical governance needs to be part and parcel of the framework, and
important progress also in this regard is the merit of this Committee's intervention.
The new macroeconomic surveillance framework represents an important addition to the EU
surveillance toolbox. The scoreboard is a key element in this [and I am aware that Parliament
is very attached to its involvement in this respect]. Let me stress that the scoreboard is a
means to an end - namely the detection of macroeconomic imbalances that threaten the
proper functioning of monetary union. The scoreboard should remain focused and concise to
draw the attention of the policy makers and the broader public to the emergence of
macroeconomic imbalances at an early point in time.
Let me be frank: the governance package is an important step forward. But, and this is
unfortunately a big "but", it still leaves a large room for discretion in the execution and
enforcement of the surveillance procedures. The effectiveness of tools and measures that
are thankfully contained in the six pack, is contingent on their implementation, not just in
letter, but also in spirit.
The track record on implementing the surveillance mechanisms is less than stellar. This
applies to both the Commission in presenting sufficiently strong proposals and
recommendations, and the Council in exerting peer pressure. I see, therefore, high
"implementation risks". The many exceptions and relevant or special factors that need to be
taken into account at different stages of the procedure unfortunately reinforce these doubts.
Therefore, the ECB regrets that one of the key aspects of the quantum leap in economic
governance that it was advocating - greater automaticity in decision-making through the use
of reverse qualified majority voting to the maximum extent possible - was only partly
achieved.
I call also on this Committee to use the new tools that are at its disposal, such as the
"economic dialogue", to enhance transparency and promote peer pressure and market
discipline. Equally, the European Semester should be improved further, to make a useful tool
of ex ante surveillance, and the ongoing discussion Parliament can exert pressure in this
regard.
Ultimately, however, what really needs to change is the mindset of all parties involved in
surveillance: they have to assume the full responsibility for the smooth functioning of EMU.
This means internalising what it means to be part of monetary union, exerting strong peer
pressure when necessary, and being ready to take the guidance received from their peers or
the supranational institutions.
The real question is whether this more fundamental change can come about without some
more fundamental shifts in competencies. As Jean Monnet, who is probably often cited in
this House, said "I have too often observed the limits of coordination. It is a method which
promotes discussion, but it does not lead to a decision." And yet the management of the euro
area economy needs effective decisions, and not just inconsequential discussions. This
leads me to my second point.
2. Longer term reforms in the economic governance framework
Current developments clearly show the need to reach a new quality of EMU governance by
going well beyond the scope of the economic governance package. We need a genuine
economic union. I trust the EP will use the review clause included in the package to enable
further enhancements to the euro area economic governance that will contribute to a
smoother functioning of EMU, for instance by introducing greater automaticity.
In my view, more fundamental deepening of fiscal and economic policy surveillance is
necessary in the long run. This will involve a transfer of sovereignty to the European level
with much stronger powers and will necessitate stricter constraints on national budget
policies.
Those reforms will require a comprehensive Treaty change but above all, an adequate
mechanism to ensure their democratic legitimacy through the appropriate involvement of the
European Parliament and the national parliaments. Let me outline the cornerstones of such a
governance reform. To ensure fiscal discipline, all planned deficits of more than 3% of GDP
and those in excess of a country's medium term objective would be approved by all euro
area governments. Past fiscal slippages would be automatically corrected in upcoming
budgets without any room for discretion via the introduction of constitutional rules similar to
the German "debt brake". All Member States would also agree to implement full automaticity
regarding fines and sanctions. Moreover, countries under macroeconomic adjustment
programmes in the context of ESM assistance and which fail to remain on track would be
placed under financial receivership.
And finally, the institutional arrangements at both national and supranational level have to be
strengthened. At the national level, independent budget offices would ensure reliable
forecasts - a prerequisite for sound planning and implementation of budgets. At the euro
area level this needs to be complemented by an independent entity with a clear mandate and
a strong institutional framework to assess the implementation of fiscal rules, for instance
some form of European Budget Office. The "EBO" could potentially form the nucleus of what
could become over time and in a step wised manner a European Ministry Finance. Strong
and independent institutions at euro area and national levels enhance transparency and add
pressure to conduct sound policies, as well as effectively counteract possible tendencies
towards a lenient implementation of fiscal rules at the level of individual member states.
3. Issuing common bonds in the euro area
Further strengthening of economic governance is a must. Do not be mistaken that there is an
alternative "silver bullet" that will resolve the current crisis and prevent future ones, such as
the issuing of Eurobonds. Given that one of the root causes of the current sovereign debt
crisis are unsustainable fiscal policies, I want to emphasise that this calls for a clear
strengthening of incentives for prudent and sustainable fiscal policies. The introduction of
common bonds in the euro area would, however, clearly weaken such incentives without
offering a long-term crisis resolution. Let me give you three main reasons for that:
Firstly, the fact that financial markets demand higher yields to fund governments with weak
fundamentals clearly provides the right incentives for governments to ensure sustainable
finances. Credible fiscal consolidation and prudent levels of government debt are in general
rewarded, whereas large budget deficits and mounting government debt are penalized in the
form of high credit risk premiums. Eurobonds would eliminate this incentive mechanism as
governments would face the same funding costs regardless of the state of their public
finances.
Secondly, the introduction of Eurobonds would also not lead to lowering the costs of the
current sovereign debt crisis; it would simply redistribute them. Common euro area bonds
imply a transfer from countries with solid public finances - as they will no longer benefit from
lower funding costs - to those with weak ones. Unsustainable fiscal positions can no longer
be punished by high credit risk premiums. This redistribution aggravates exiting moral hazard
problems and undermines the long-term fiscal sustainability in the euro area. On top of this,
via common bonds strong and weak countries enter into mutual obligations of very large
size. This carries the risk that the sound countries will be taken hostage, e.g. to accept a
gradual erosion of commonly agreed fiscal rules.
Thirdly, it is not clear at all whether an introduction of Eurobonds would really help to resolve
the sovereign debt crises. Part of the government debt in the euro area would of course be
converted into common euro area bonds. The remaining part will, however, still need to be
funded the old-fashioned way - by means of standard sovereign bonds. Whether financial
market participants would be willing to buy and hold sovereign bonds of countries with weak
fundaments is by far not sure, also given the current level of risk aversion. In an extreme
case, we might see a complete flight out of individual sovereign bonds towards Eurobonds,
which would rather lead to a worsening of the sovereign debt crisis and not to its resolution.
Eurobonds do not offer a solution of the sovereign debt crisis and are not a viable instrument
of government financing. Maybe it is worth remembering that all the proposals I have seen so
far for Eurobonds are, at the heart, governance proposals. None of them can do with out
massively reinforced governance or outright sovereignty transfers to the supernational level.
The more appropriate way to look at Eurobonds is to start with governance: Only with a
fundamental shift of our structures in the European Union - towards a real political union -
could one conceivably create incentive and governance conditions that are commensurate
with the issuance of common bonds. Before talking about Eurobonds, we should identify the
necessary reforms that focus on the ultimate objective: institutional arrangements which
provide credible incentives for sound fiscal and economic policies.
Dear Chair, Honourable Members, I thank you for your attention.