Luis de Guindos: An EU financial system for the future
Keynote speech by Mr Luis de Guindos, Vice-President of the European Central Bank, at the
Joint conference of the ECB and the European Commission on European financial integration,
Frankfurt am Main, 6 April 2022.
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Introduction
It is my great pleasure to open today's conference. I would like to use this opportunity to reflect on
some important developments in financial integration that have taken place over the last two
years, and assess them from the perspective of an EU financial system for the future - the title
of today's conference.
I will begin by touching on the pandemic's implications for the financial sector in Europe. I will
discuss how the progress achieved on financial integration since the start of Economic and
Monetary Union (EMU) has helped to increase the resilience of the EU financial sector, before
arguing that a further deepening of EMU can help tackle the current and future challenges that
come our way. I will then conclude by reflecting on the economic fallout from the Russian
invasion of Ukraine, and the implications that could have for financial stability and financial
integration.
Financial integration now and in the past
Let me first discuss the implications of the pandemic crisis. When the pandemic began, we saw
a notable decrease in euro area financial integration. But thanks to fast and decisive policy action
at the monetary, fiscal and prudential levels, this deterioration not only stopped, it actually
reversed relatively quickly. This is in contrast to what has typically occurred in previous crises.
As the pandemic unfolded, public health measures, mobility restrictions and production
constraints limited household consumption levels. This meant that key private channels of
risksharing across euro area countries were restricted. So public risk-sharing via governments
became crucial for macroeconomic stabilisation.
Major fiscal initiatives at EU level were key to ensuring that risks were shared among Member
States, compensating for the fact that private financial channels were hampered. Sizeable fiscal
risk-sharing mechanisms were established with the Next Generation EU recovery package. The
associated investments and reforms are expected to improve risk-sharing at the public sector
level over the coming years. Joint support from fiscal and monetary policy has been
indispensable in avoiding a much deeper economic downturn. For example, credit support
measures, such as loan guarantees, proved critical in shoring up the financing of firms and
households during the pandemic.
At the same time, we should not overlook the decisive role played by the EU financial system in
weathering the crisis, notably by being able to meet financing needs during the pandemic. The
fact that the system could withstand a shock the size of the pandemic is testament to the
effective implementation of ambitious financial reforms in the aftermath of the global financial
crisis.
But it's important to remember that it took a lot of hard work to achieve this resilience. EU
financial integration has come a long way since the launch of EMU in 1992. Soon after the
introduction of the euro, policymakers realised that the single currency alone was not enough to
spur the further development and integration of the EU financial system. Support was needed
from policies that were conducive to the free flow of financial services in the euro area, in addition
to adequate legal, regulatory and supervisory frameworks, along with greater institutional
integration. There were several milestones on the road towards European financial integration,
including the European Commission's Financial Services Action plan for the harmonisation of the
EU financial services markets starting in 1999, the Lamfalussy architecture to improve regulatory
processes introduced in 2001, the launch of the banking union in 2012 and the two subsequent
action plans for the capital markets union (CMU) in 2015 and 2020.
Despite these achievements, there is still more work to be done. We need to push forwards and
further deepen EMU. And we need to do so while keeping in mind the new challenges that we
face, such as the transition to a sustainable economy.
The growth of green finance can facilitate - and, at the same time, benefit from - the integration
of EU capital markets across borders. Deeper and more efficient capital markets, with equity
playing a greater role, can be instrumental in encouraging the more rapid development and
adoption of new technologies, including green technologies, and in facilitating the provision of
finance across the EU. Indeed, research finds that carbon-intensive industries tend to reduce
1
emissions faster in economies with deeper stock markets.
Last November the European Commission published the CMU package containing legislative
proposals and key commitments in the CMU action plan. This was an important step, but we
need to be more ambitious in three main areas if we are to achieve a deeply integrated CMU.
First, we need to see a harmonisation of insolvency rules and withholding tax regimes. That will
help create a more integrated financial sector that can easily operate across borders, including in
green market segments. The ECB is therefore looking forward to the upcoming Commission
proposals on this matter.
Second, reducing the debt-equity bias and harmonising venture capital frameworks across
Member States are important steps to support equity and risk capital markets and thereby
provide smoother financing for innovation.
Third, we need to make progress on the EU's sustainable finance agenda. There should be no
more delays as we strive for a reliable and transparent regulatory framework. Sustainability
disclosures and reliable standards for green financial products are key to reaping the benefits of
a green CMU. This is why we need the Corporate Sustainability Reporting Directive to be
implemented swiftly, alongside the broad adoption of a sound and usable European green bond
standard.
While CMU is a crucial pillar for EMU, we also need to see progress on other fronts. The banking
union remains incomplete. But completing it is essential if we are to enhance the financial
sector's resilience and further address some of its structural challenges. These include low bank
profitability, growing competition from fintech companies and the fragmentation of debt and equity
markets along national lines.
Completing the banking union requires efforts in two areas: improving the crisis management
framework and making progress towards a European deposit insurance scheme (EDIS). We
very much welcome the balanced workplan proposed by the Eurogroup President, which should
provide a good basis for reaching political agreement on these matters as swiftly as possible.
Another element to ensuring that banks further increase their resiliency is the timely and full
implementation of the remaining elements of the Basel III agreement. The ECB welcomes the
Commission's proposals in this respect, which will lead to a stronger prudential framework and
help tackle emerging risks, such as environmental risks.
Pushing ahead with these important initiatives will further strengthen Europe's resilience to future
crises, allowing us to respond quickly. After all, the terrible events of the last six weeks have
reminded us how quickly the economic environment can change.
Financial stability and integration in view of the Russia-Ukraine war
The Russian invasion of Ukraine marks a watershed moment for Europe. This is, first and
foremost, a human tragedy. But the economic fallout has also re-introduced substantial elements
of uncertainty just as the euro area economy is emerging from the pandemic.
In the first weeks after the invasion, we saw visible implications for financial integration in the
euro area, driven primarily by bond markets. Announcements of sanctions against Russia led -
initially, at least - to a slight divergence of sovereign and corporate bond yields across euro area
countries. This caused euro area indicators of financial integration to recede - as captured, for
instance, by a measure of the convergence of asset prices across the euro area. But the good
news is that this indicator has partly recovered since then. And, importantly, these movements
were nowhere close to what we saw during the global financial crisis and at the beginning of
pandemic.
For the euro area, the financial stability impact of the war has so far been relatively contained.
Markets have generally been functioning well. Contrary to what happened in March 2020, there
has been no dash for cash. While both banks and non-banks have been affected - especially the
few that have large direct exposures to Russia and Ukraine - the economic fallout has not had a
sizeable impact on the EU banking or financial systems as a whole. Euro area banks' initial stock
price reaction suggested a much stronger impact than was implied by their direct exposures,
which stood at less than 1% of banks' assets. This points to much greater concerns about
growth and inflation, and the impact the conflict is having in amplifying them.
The invasion of Ukraine also demonstrated how vulnerable Europe is due to its high dependency
on fossil fuel imports from Russia. Speeding up the green transition is a key priority from this
perspective too - not only to address the urgent environmental and climate challenges we face,
but also to help increase our energy security and protect the EU economy from energy price
spikes.
Recent events have reaffirmed the importance of financial integration. First, financial integration
together with adequate regulatory and supervisory frameworks improves the resilience of the EU
economy and its financial sector. In particular, the sound capital and liquidity buffers that have
helped European banks absorb shocks owe a lot to the Single Rulebook and European banking
supervision - key elements of our banking union.
Second, financial integration has improved our ability to take credible actions and has given those
actions greater weight. Close collaboration in various aspects of EU financial decision-making
allowed EU financial sanctions to be adopted swiftly and implemented consistently. And the ECB,
for its part, is taking an active role in implementing these sanctions in its areas of competence.
Conclusion
Let me conclude.
European integration has already come a long way since the start of EMU. But we are not at the
finish line just yet. Our journey is an ambitious one, and we must quicken our pace.
During this troubled time for Europe, I am reminded of the words of Konrad Adenauer, the first
Chancellor of West Germany. He once said: "European unity was a dream of a few people. It
became a hope for many. Today it is a necessity for all of us."
These words were spoken almost 70 years ago, just as the wheels of European integration were
turning faster. Let us keep those wheels moving. Our current challenges call for decisive joint
action from all of us as we work towards a strengthened European financial system and a solid
EMU. I have no doubt that we will reach the finish line.
Thank you for your attention.
1
De Haas, R. and Popov, A. (2019), "Finance and carbon emissions", Working Paper Series, No 2318, ECB,
September.