Yannis Stournaras: Responses to the euro area crisis and challenges
ahead
Welcoming address by Mr Yannis Stournaras, Governor of the Bank of Greece, at EMS
Managing Director Klaus Regling speech "Overcoming the Euro Crisis", Athens, 10 July
2014.
* * *
The euro area crisis stems from the fact that Economic and Monetary Union (EMU) is a
complete monetary union but an incomplete economic and financial union. Indeed, the roots
of the crisis are complex, resulting from an interaction between inadequate architecture and
inadequate implementation of the structures that had been put in place.
Five years after the start of the crisis, the outlook appears brighter. The euro area has moved
out of recession, intra-euro area macroeconomic imbalances have been significantly reduced
and the changes to the institutional framework underpinning EMU have been considerable
leading to a stronger architecture.
Response to the crisis (at national and EU level)
In order to address the underlying economic and institutional challenges stemming from
crisis, euro area countries had to respond with a comprehensive strategy. This strategy
included both measures at the national level as well as at the level of European Union
institutions.
First, Europe responded with the creation of the necessary financial backstops. The
establishment of the EFSF and, later, the ESM allowed euro area members to grant loans at
favourable interest rates and under strict conditionality to countries that had lost market
access.
Second, the Governing Council of the ECB was innovative in its conduct of monetary policy,
putting in place both standard and non-standard policy measures. These measures helped
increase confidence and were directed at restoring the smooth operation of the monetary
transmission mechanism. The downward adjustment of interest rates, the provision of
sufficient liquidity and the Securities Market Programme all played their role.
As a further step, the ECB announced in September 2012 the Outright Monetary
Transactions (OMT) programme, which contributed significantly to the improvement in
financial market conditions in the euro area, the decline in sovereign spreads and the gradual
reversal of financial fragmentation. The latest non-standard measure, the targeted
longerterm refinancing operations, is designed to support lending to the real economy.
Third, there has been a significant correction of external and domestic imbalances in
individual euro area countries, with significant progress having been achieved to regain
previous losses in competitiveness and cut back fiscal deficits.
At the same time, structural reforms have gathered pace and programme countries in
particular have undertaken substantial reforms in order to make the economies more flexible
and market-oriented.
Fourth, significant steps have been taken to improve economic policy coordination. These
measures included the strengthening of the Stability and Growth Pact, the establishment of
the European Semester, stronger emphasis on macroeconomic imbalances and the Fiscal
compact.
Last but not least, crucial steps have been agreed to move towards the creation of a Banking
Union. The Single Supervisory Mechanism will start operating in November 2014 and
agreement on the Single Resolution Mechanism has been reached. These measures will
work to reinforce the European banking system, reduce the negative feedback loops
between banks and sovereigns and overcome fragmentation in EU financial markets,
promoting growth.
Results and challenges ahead
The European strategy to deal with the crisis is delivering results, as interest rate differences
between core and periphery countries have been reduced, programme countries have
regained market access and the banking sector has been strengthened.
However, many challenges remain. A key characteristic of the euro area economic recovery
is the continuing decline in loans to the private sector. The recovery is so far "creditless" at
both the euro area as a whole and, in many cases, in individual countries. Because the euro
area economy is bank-based, bank lending is especially significant for companies and, in
particular, for SMEs, which produce the bulk of goods and services and account for a large
share of employment. Consequently, the on-going credit contraction raises the question: Can
the recovery be sustained in the presence of negative loan growth? Personally, I doubt it.
Looking ahead, there is a need to deal with limited potential growth in the euro area. To this
end, euro area members are increasingly recognizing the need for joint efforts and
coordinating national structural policies for growth and jobs, as reflected in the recent
conclusions of the European Council.
Today's speaker
Klaus Regling, as the first Managing Director of the European Stability Mechanism and Chief
Executive Officer of the European Financial Stability Fund, has been at the centre of the euro
area crisis.
His career has spanned 35 years in senior positions mainly in the public sector. He worked at
the IMF in Washington and Jakarta; he spent around 10 years at the German Ministry of
Finance, working on preparations for monetary union; he then moved to the European
Commission where he was Director General for Economic and Financial Affairs from 2001 to
2008.
He is thus perfectly suited to address the issue of how we overcome the euro area crisis.