Mario Draghi: Introductory remarks at the French Assemblée Nationale
Speech by Mr Mario Draghi, President of the European Central Bank, at the French
Assemblée Nationale, Paris, 26 June 2013.
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Presidents,
Honourable Members of Parliament,
I would like to thank you very warmly for having invited me to address this historic chamber.
As President of the European Central Bank, it is an honour to speak in a nation that has
done so much to promote and further the cause of European integration.
Project for
It was exactly 300 years ago, in 1713, that the Abbé de Saint-Pierre presented his
Perpetual Peace, one of the first visions for a union between European nations.
That this vision emerged into reality is thanks in large part to generations of French thinkers
and pioneers, like Jean-Jacques Rousseau, Victor Hugo, and Aristide Briand. It is also
thanks to the makers of the modern European Union like Robert Schuman, Jean Monnet,
and Jacques Delors.
In other words, this country has played a key role in building the peaceful, open and united
Europe we see today.
But as you know, the EU, and the euro area in particular, is faced with important questions
about its direction. It needs a new consensus on how to move forward.
I am confident that France will again play a key role in that process.
In my introductory remarks today, I would like to focus on three topics: the ECB's monetary
policy, growth and adjustment in the euro area, and the progress towards building a deeper
economic and monetary union.
I am here today to present the ECB's views, but also to listen and to learn. I look forward to
hearing your opinions and taking your questions.
The ECB's monetary policy
Let me begin with the ECB's monetary policy.
The ECB's mandate is to maintain price stability, which is essential to support long-term
growth, defend citizens' purchasing power and maintain sustainable and high employment. In
order to deliver our mandate, the ECB has done a great deal to support the euro area
economy.
First, we have reduced our main interest rate to the historic low of 0.5%.
Second, we have introduced a series of measures to ensure that banks can pass on these
low interest rates to borrowers in the real economy.
These measures include allowing banks to borrow as much liquidity from the ECB as they
need; expanding the range of collateral they can use to access that liquidity; intervening in
bond markets that were malfunctioning, like the sovereign bond market or the covered bond
market; and launching two three-year Long-Term Refinancing Operations (LTROs), which
injected more than 1 trillion euro into the euro area banking system.
Overall, our balance sheet increased from just below 1.5 trillion euro before the crisis to more
than 3 trillion euro at its peak.
Our measures are primarily focused on banks because, in the euro area, bank lending is the
main channel through which firms and households get access to finance.
Around three quarters of firms' external financing comes from banks, compared with only
around one quarter in the United States. Supporting the banking system is therefore
essential to support growth in the euro area - and to fulfil our mandate to maintain price
stability.
More recently, the ECB has acted to remove unfounded fears about the future integrity of our
monetary union. These fears were creating severe turbulence in financial markets and
preventing our low interest rates from reaching the countries where they were needed most.
As a result, we saw a risk of a widespread credit crunch in these countries. Questions over
fiscal sustainability and growing market distrust were starting to spill over into their respective
banking sectors. The effects for growth and employment would have been severe.
Indeed, investors were suddenly losing confidence that the euro area could survive in its
current composition. The prospect that claims on governments and private companies in
certain countries could not be discharged in euros had become a possibility.
Our response was to introduce the programme of Outright Monetary Transactions (OMT),
which allows for ex ante unlimited interventions in sovereign debt markets. OMT has been
effective in restoring market functioning and trust in the euro area.
For example, since the OMT announcement, bond markets have steadied, providing
discipline without becoming destructive. Spreads on long-term bonds for Spain, Italy and
Ireland have declined by around 150-250 basis points, and for Portugal by almost
500 basis points.
And this has helped reduce financial fragmentation within the euro area, as shown by the
best indicator we have for fragmentation, the level of Target balances. These have declined
by 285 billion euros, or 25%, since the peak last year. France, like all other member states,
has benefited significantly from this stabilisation.
In short, the ECB has been very active in responding to the crisis. We have robustly
defended the stability of our monetary union and therefore of our money. And we stand ready
to act again when needed.
However, it is important to acknowledge that there are limits to what monetary policy can
achieve. This is not a question of the scope of our mandate. It is fundamentally about what
different institutions are empowered to do.
One pertinent example is the current shortage of credit for many households and small- and
medium-sized enterprises. Credit provision requires funding, capital and a positive risk
assessment. The central bank can help ensure funding and address macroeconomic risk.
But it cannot provide capital, nor can it affect banks' assessment of the creditworthiness of
individual borrowers.
Similarly, monetary policy cannot create real economic growth. If growth is stalling because
the economy is not producing enough or because firms have lost competitiveness, this is
beyond the power of the central bank to fix.
Yet, the euro area needs sustainable growth.
There are currently more than 19 million people unemployed in the euro area. Almost a
quarter of young people are out of work. Such high levels of joblessness are a tragedy.
Moreover, a weak economy means fewer taxpayers and lower revenues. This puts pressure
on public finances, and ultimately on our social models.
So what is the best way to achieve the growth Europe needs?
Let me turn to this issue now and share with you some reflections on this subject.
Growth and adjustment in the euro area
Some euro area countries have in the past relied on debt to support growth and fund social
spending. But this path has led them to a difficult situation today. They have ended up with
high public debts while growth has steadily fallen.
In this country, for instance, public debt has risen from around 20% of GDP in 1980 to over
90% of GDP today. In that time, annual GDP growth averaged 2.3% in the 1980s, 1.9% in
the 1990s, and 1.8% in the 2000s up to the crisis.
This suggests that, for all euro area countries, a new approach is needed. An approach that
can deliver growth and jobs, and sustain social models, without creating an unsustainable
debt burden for future generations.
In my view, this requires two complementary responses.
The first response is to ensure that fiscal consolidation, which is necessary to contain debt
levels, is made as growth-friendly as possible.
For instance, relying less on tax increases would help sustain citizens' disposable income.
Prioritising capital investment over current spending would do more to lay the foundations for
future growth.
Structural fiscal reforms, for example to pension systems, would also help support fiscal
sustainability without negative effects on the economy today.
The second response is to raise competitiveness and increase the underlying productive
capacity of our economies.
Here, the frontier is reforms that target the structure of the economy. These include reducing
barriers to entry for new firms and young people, and removing burdens on business like
complex tax and labour laws or distortionary regulations. Reforms to the labour market are
also essential to create the highest possible opportunities for employment.
We are already seeing progress on rebalancing in the euro area: unit labour costs are
coming down in countries where they had grown excessively; current account deficits are
narrowing where there had been large imbalances in the past; and export growth is generally
picking up in countries under strain.
But in many euro area countries, the gap the between wages and productivity is still out of
line with competitiveness. To increase employment, this gap should be closed and all the
many policy levers that can contribute to this should be used. Changes to two-tier
employment systems that protect insiders and harm outsiders are one such lever.
Let us not forget that those who suffer the most from unreformed labour markets are often
young people, as evidenced by the very high levels of youth employment today. I therefore
welcome the joint initiative of the French and German Labour ministers to tackle this issue.
This underscores an important point about reforms: by restoring competitiveness and
creating opportunities for a wider range of people, they benefit the many, not the few.
Reforms are an expression of solidarity between citizens. Solidarity across countries is also
important, but it would be meaningless without solidarity within countries.
Building a stronger EMU
What role can the euro area as a whole play in supporting growth and stability across
Europe?
Governments are today reflecting deeply on this question. They are considering what was
missing in the original design of Economic and Monetary Union (EMU): what responsibilities
need to be shared at the European level, and what not, to make EMU function effectively.
In my view, this debate should be driven by a single question: how can we best protect the
vital interests of euro area citizens? And where the answer involves transferring sovereignty
to the European level, we should not hesitate to do so.
The best example of this is Banking Union.
Banking Union is essential to ensure that we make permanent the progress made in
reintegrating financial markets; that financial conditions in both core and periphery countries
return to normal; and that our monetary union becomes truly single again.
It has two indispensable elements: a strong Single Supervisory Mechanism (SSM) and a
strong Single Resolution Mechanism (SRM).
A strong system of common supervision is key to increase confidence in the health of euro
area banks, which has been damaged due to supervisory failures in the past. Progress is
already well underway here, and the Single Supervisory Mechanism will take over
supervision one year after the legislation is adopted.
But to ensure that common supervision is credible, it needs to be accompanied by a
mechanism that can wind down failing banks without causing financial instability. This is why
we need a Single Resolution Mechanism. And it needs to have a strong European dimension
to be able to deal effectively with large, cross-border banks.
But Banking Union is not the only example of where closer union is needed. Ultimately, the
euro area needs to be drawing closer in all fields of economic policy.
The recent call from the leaders of France and Germany for closer economic union shows
that this message is being understood. But it is important that form is fully aligned with
substance. In my view, a true economic union means three things.
First, it means every country ensuring its national economy functions properly, without
external imbalances and high unemployment. We cannot have a strong economic union
without strong national economies.
Second, it means transferring some sovereignty over decision-making to the European level
- accepting decisions that are made for the good of the euro area as a whole, even if, at that
moment in time, individual countries may disagree with them.
Third, it means applying the same rules to all members of monetary union. This is not only a
condition of fairness between countries, but also a pre-condition for deeper integration. Only
if there is trust that each member will play by the rules can a union of mutual solidarity
become possible.
For these reasons, moving towards closer economic union also requires an equivalent
deepening of political union. Greater authority at the European level must be matched by
greater democratic legitimacy. And here both the European Parliament and national
parliaments have a key role to play.
As Herman van Rompuy has reminded us, national parliaments have become EU
institutions.
Conclusion
Let me now conclude.
The euro area has made much progress in recent years, but it still faces many challenges.
Solving them requires EU institutions and national governments to work in concert.
The ECB has done as much as it can to stabilise markets and support the economy. Now
governments and parliaments need to do all they can to raise growth potential, strengthen
competitiveness and build a stronger, more stable EMU.
I was impressed to learn that, back in 1871, Victor Hugo called in this Assembly for a United
States of Europe.
France today can be equally ambitious in taking the euro area forward.
Thank you for your attention.