Carlos da Silva Costa: The euro 20 years on - the debut, the present
and the aspirations for the future
Opening address by Mr Carlos da Silva Costa, Governor of the Bank of Portugal, at the Bank of
Portugal Conference: "The euro 20 years on: the debut, the present and the aspirations for the
future", Lisbon, 15 November 2019.
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It is with great pleasure that I welcome you to this Conference that marks the first 20 years of
the euro. Now is an opportune moment to take stock of these two decades and to reflect upon
the lessons we have learned and on how they should shape our response to the
challenges ahead. The start of a new EU institutional cycle also adds importance to this
reflection.
I totally concur with Mario Draghi when he said, in January, at the European Parliament, that
"The euro is the most tangible representation of European integration that our citizens
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encounter, on a daily basis" . Indeed, the euro is the most visible face of the collective will of
19 Member States that have decided to share a common destiny and who believe that together
they are stronger. Other Member States are expected to join them in this joint endeavour very
soon.
The European Economic and Monetary Union (EMU) is a
unique case of monetary integration
and its construction has never been easy or consensual. From the outset, the EMU was
criticised, and several voices - especially from the other side of the Atlantic - predicted a
short life for the euro.
I would say that the birth of the European single currency project was accompanied by
"two fairy godmothers" with negative omens for its future:
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1. The theory of optimal currency areas (OCA), including the criteria deemed necessary for
a region to qualify as an OCA and benefit from a common currency;
2. The idea that without effective federal power there could be no successful single
currency.
and contrary to the views of the prophets of doom - which recently seem to
Twenty years later,
have become very active again - the euro is here to stay. It has become stronger over the
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years, and popular support is currently at historic highs . The single currency functions like
a it brings people closer in many ways and creates a social bond and a
common language:
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common identity .
The euro's resilience shows that its main foundations are sound and that its founding
fathers were steering the European project in the right direction. The euro is not the
result of a single political decision. It is the result of successive political decisions and
the evolution of the European integration process.
The euro is a logical and necessary consequence of the single market. Currency
fluctuations - even when resulting from the normal functioning of the markets - translate into
subsidies/penalties for economic agents and create uncertainty. They distort competition,
generate trade reallocations not based on economic fundamentals and cause social discontent.
It was evident that the
Exchange Rate Mechanism of the European Monetary System was
not compatible with the degree of openness of the economies participating in the single
market and the existence of autonomous monetary policies.
It was this inconsistency that led to the 1992-1993 currency crisis, which clearly showed in
practice that an internal market without a single currency is necessarily an unstable
equilibrium. The euro has safeguarded the integrity of the single market and has delivered
two decades of price stability.
The euro has fostered confidence and brought important and tangible benefits to European
households, businesses and governments. Naturally, it has also introduced new requirements
with regard to the behaviour of economic agents as well as new rules and institutions. It made
the need for adequate policies, sound public finances and financial discipline of private
actors more visible.
A single currency implies a single monetary policy and, in a context of markedly
heterogeneous national revealed preferences, there is a risk of inconsistency between national
economic and fiscal policies and the common monetary policy. It was therefore clear from the
outset of EMU that it would be necessary to create discipline, rules and institutions that
would reduce disparity in order to ensure stability.
The EMU rests on a comprehensive set of rules and on a non-federal institutional
framework based on a sharing of sovereignty between Member States and, above all, on
mutual trust. This means that its success hinges on its members making every effort to
understand each other and to mutually realise their interests. In a nutshell, the euro is the result
of a dialectic process between solidarity and responsibility towards a common good.
The functioning of EMU is based on permanent negotiation and approximation of different
starting positions, safeguarding national cultures and identities while guaranteeing a sense of
belonging and a "group identity". This implies an institutional framework with a great capacity
to understand and manage differences and to facilitate the interaction between the interests
of the whole and the specificities of the parts. The principles of collective ownership and
consensus must always be kept in mind.
The European regulatory framework and the architecture of the EMU have significantly
evolved and consolidated over the years, notably in response to the sovereign debt crisis in
the wake of the global financial crisis.
In fact, the sovereign debt crisis in the euro area brought to the forefront the weaknesses of the
exposing the
EMU framework, particular vulnerability of euro area Member States to
changes in markets' sovereign risk perceptions. The link between the financial system and
the sovereign was absent from the Maastricht context and meant that
the "no bailout" clause
no Member State could expect the Union to bail it out, while respecting the monetary financing
prohibition.
To face the huge challenges posed by the crisis it became clear that decisive and urgent action
had to be taken to ensure stronger economic governance, better coordination of Member
States' policies and a sounder financial sector.
Far-reaching improvements were introduced into the regulatory and institutional
framework, the economic coordination and surveillance procedures (e.g. the European
Semester and the Macroeconomic Imbalance Procedure) and the European financial sector,
which underwent a remarkable transformation.
Since the outset of the crisis, the ECB has played a crucial role and helped saving the euro. With
its unconventional policies, it allowed the time for political agents to adjust their fiscal
policies, to adopt structural measures and to agree on regulatory and institutional improvements
needed for a sustainable EMU.
In the euro area, the Banking Union was launched. Its initial design envisaged a Single
(SSM), (SRM) and
Supervisory Mechanism a Single Resolution Mechanism a common
deposit guarantee scheme underpinned by a single rulebook. The SSM and the SRM have
been successfully implemented. However,
the political will to complete the Banking Union's
architecture has waned in recent years with policy-makers focusing excessively on the risk
reduction versus risk sharing debate.
The fact that some critical elements of the Banking
Union are still missing undermines its fundamental benefits.
While we must not underestimate the remarkable progress that has been achieved in recent
years, we should acknowledge that Europe's financial architecture still needs to be further
strengthened to withstand the impact of a possible future crisis. This must be a priority for
policy-makers and relevant institutions because not many things can be more destructive to
public trust in European institutions than threats to financial stability. In particular,
decisive political will to move forward with the completion of the Banking Union and the
development of the Capital Markets Union is much required.
Furthermore, in this still incomplete EMU, the interaction between monetary and fiscal
policies, their roles and limitations for macroeconomic stabilisation and the adequacy of
the current Stability and Growth Pact are ever more at the forefront of the policy debate. All
these issues need to be addressed.
I have already underlined the importance of a coherent and sound legal and institutional
framework. We must, however, be aware that, even with appropriate rules and institutions,
a monetary union is not immune to exogenous shocks and specific problems in any of its
members.
The EMU needs stabilisation mechanisms to support Member States facing serious financial
difficulties while safeguarding the stability and cohesion of the group. This need is one of the
major lessons of the financial crisis and the reason for the creation in 2010 of a temporary
rescue fund, the European Financial Stability Facility (EFSF), and subsequently, in 2012, of a
permanent institution, the European Stability Mechanism (ESM).
Both the EFSF and the ESM have played a vital role in safeguarding the stability of the
euro area as a whole, functioning as a common firewall and providing support to the most
affected Member States to resume or maintain access to sovereign bond markets. Together with
fiscal and structural reforms at European and national levels, the ECB's unconventional
monetary policy and the establishment of the Banking Union, these funds were instrumental in
dealing with the worst of the crisis and to save the integrity of the euro.
Reform of the ESM is on-going to reinforce its role, its operational capacity and the
effectiveness of its instruments. This reform must be seen as an integral part of the agenda on
deepening EMU and needs to be ambitious.
I have always argued that the ESM should evolve towards a true European Monetary
Fund, a robust crisis management body, incorporated into EU law. An independent and
accountable institution with a clear mandate and adequate resources and firepower. These are
necessary conditions for the development of win-win solutions. The work currently underway on
the ESM Treaty should therefore not be seen as the final result, but as a step towards a more
ambitious long-term goal.
Let me conclude.
During its first 20 years of life - and contrary to the initial bad omens - the euro's institutional
framework has proven its ability to overcome the difficulties stemming from the
coexistence of economies in different stages of development, and sovereignty-sharing
mechanisms have acted as a proxy for a central political power.
Today's conference calls upon us to assess these first two decades of the euro as well
as to reflect on its future:
1. Which are the main challenges ahead?
2. How should EMU evolve?
3. What should we aspire for the future role of euro at the global level?
These are very important questions, which we must all reflect upon in order to contribute to
further strengthening the European project, bearing in mind the profound and rapid
changes, at all levels, that have been taking place in the world in the last few years.
In the current globalised, competitive, digitalised and interlinked environment, there is an
increased need for euro area countries to work together to exercise sovereignty and
make their voices heard. We should always bear in mind that sharing sovereignty is not a
synonym of loss of control or power. Internal cohesion and "teamwork" will help protect
Member States from external pressures and spillover effects, and empower their policy
choices.
Member States must therefore persist in working together in a committed way to continue
the journey that started in 1999, so that European citizens can fully reap the benefits of their
common currency. Cooperation within EMU will also support an increased role of Europe
and the euro in the world.
I am sure that today's discussion will be very fruitful and will bring new, good ideas to help
equipping the euro area with the tools it needs to withstand headwinds and to prosper.
Quoting Robert Schuman: "Europe will not be made all at once, or according to a single
plan. It will be built through concrete achievements which first create a de facto
solidarity". And it goes without saying that solidarity must go hand-in-hand with responsibility,
which entails rules and mutual surveillance institutional mechanisms.
Before giving the floor to Jean-Claude Trichet, I consider it both an honour and a duty to
underline the important role he has played at several stages during the EMU creation
and consolidation process, notably in the pre-Maastricht political negotiations and as President
of the ECB.
Dear Jean-Claude, the floor is yours.
Thank you.
currency?" Real Instituto Elcano, 25/IV/2017.