Yves Mersch: Institutional overhaul of the euro area - progress and
remaining challenges
Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank,
at a conference, organised by the Association Européenne de Droit Bancaire et Financier
Luxembourg, Luxembourg, 5 May 2014.
* * *
Ladies and gentlemen,
It is a pleasure to be with you today to discuss the institutional overhaul of the euro area, a
few days ahead of the "Europe day" commemorating the Schuman declaration of 1950.
Introduction: from Schuman to Delors
With this declaration, Robert Schuman set the path towards the creation of the European
Coal and Steel Community, the first of a series of supranational European entities that would
ultimately become today's European Union.
The aim of this initiative was clear from the outset, as put in Schuman's words: "In this way,
there will be realised simply and speedily that fusion of interest which is indispensable to the
establishment of a common economic system; it may be the leaven from which may grow a
wider and deeper community between countries long opposed to one another by sanguinary
divisions"1.
Less than forty years later, the Delors report which laid out the rationale and framework of
Economic and Monetary Union followed a similar logic. Beyond its economic motivations, the
introduction of the euro had also a political dimension: by setting up a common Economic
and Monetary system, the founding fathers of the euro strived to create a deeper community
among euro area Member States.
Due to the severity and duration of the current economic crisis we tend to forget that the euro
- as a broader political project - has been and remains very successful. The geopolitical
turmoil at the doors of Europe reminds us that political stability and security should not be
taken for granted.
This does not mean that the title of today's conference has lost its relevance. On the
contrary: the crisis has shown that in order to reap all the economic benefits of the euro -
and more generally of the Single Market -, a number of reforms have been necessary. In
adopting these reforms, a delicate, yet essential equilibrium has to be found between those
who wanted to follow the path of further integration and those wishing to remain outside. But
both dimensions, the euro area on the one hand and the broader EU on the other hand, are
not incompatible. Indeed, a strong Single Market is essential for a well-functioning single
currency. Reciprocally, putting the euro area on a stronger footing is important for the euro
area itself but also benefits the countries that do not share the euro.
At the eve of the European elections, it is good to assess the concrete progress achieved in
the last five years in the field of the institutional architecture and common set of rules for the
euro area and the EU at large. In the immediate future, it is of crucial importance to
implement the new legislation as thoroughly as possible, both at European and national
level. Only then will Europe be able to provide stability, growth and job creation. Looking at
the next legislature, further legislative action is necessary to complete the Single Market for
financial services. In the longer term, reflection is warranted on how to further develop the
institutional framework of the euro area.
The EU, and the euro area in particular, has drawn the right lessons from the financial
and sovereign debt crisis
The crisis has painfully brought to light the shortcomings in the implementation of the
Maastricht Treaty. First of all, it was believed that European rules, together with pressure
from the financial markets, would be sufficient to ensure fiscal discipline on the part of
Member States while budgetary competences remained at the national level. Second, the
emergence of macroeconomic imbalances was not monitored sufficiently as coordination of
economic policies was considered to be a secondary objective. Third, there was no coherent
strategy in terms of harmonisation of rules and surveillance of the financial sector. Finally, no
European crisis management framework was in place when the sovereign debt crisis struck.
However, the crisis has provided the occasion for the euro area, and the EU at large, to
equip itself with new instruments to address these weaknesses. Two key principles have
guided the crisis response: self-responsibility and solidarity.
In line with the first principle, the six-pack, the two-pack and the Fiscal Compact have made
the economic and fiscal governance framework more commensurate to the requirements
of a monetary union. The Commission and the Council now dispose of tools and procedures
to allow for the early recognition and correction of excessive macroeconomic imbalances and
unsound fiscal policies. Most importantly, the new framework is completed with a set of more
automatic sanctions in the event of a Member State deviating from agreed benchmarks.
In line with the second principle (i.e. solidarity), Member States have created a crisis
management framework to deal with Member States losing market access. With the
European Stability Mechanism (ESM) and the two-pack, both a permanent funding
instrument and a governance framework have been created. A few days ago, the ESM
has reached its target level of €80 billion in paid-in capital. The exit by Ireland and Portugal
from their EU/IMF programme shows that reform efforts and sacrifices are bearing fruit.
Beyond these economic governance reforms, and reflecting the lessons drawn from the
financial crisis, significant progress has been achieved with regard to financial sector
policies, both in the EU as a whole and in the euro area.
First, in the late 2000s it became clear that the financial sector had to be put on a safer
and more resilient footing. To this end, EU legislators adopted the Capital Requirements
Regulation (CRR) and Capital Requirements Directive (CRD) in April 2013: this was an
essential step towards strengthening the stability of the banking sector and thereby
preventing future crisis. More recently, the Bank Recovery and Resolution Directive (BRRD)
was agreed upon. To comply with the new rules of the BRRD, banks across the EU will have
to develop in a harmonised way recovery plans, cooperate with resolution authorities and
make necessary changes to capital holdings, business activities, legal and operating
structures. Finally, harmonised standards for deposit guarantee schemes have been
introduced.
The four pieces of legislation just mentioned apply to the financial system in the EU at large:
this is key to ensure a level playing field within the Single Market. Taken together, these
new rules constitute the ground floor of the European "house" for financial services.
The euro area Member States decided to build an additional floor in this common house by
creating the banking union. They are currently in the process of setting up powerful
institutions for the supervision and resolution of their banks at the European level. Many will
agree with me if I say that this project is the most significant step forward in the integration of
European financial markets since 1999. It is an indispensable complement to the single
currency and should contribute to addressing the adverse feedback loop between banks,
public finances and macroeconomic conditions. It should also help to reduce the
fragmentation of euro area banking and money markets and thereby facilitate the
transmission of the ECB's monetary policy.
The first element of the banking union, which is the Single Supervisory Mechanism, will
soon be fully operational. On 4 November this year, the ECB is set to start directly
supervising about 130 significant banks in all euro area Member States. All smaller banks will
continue to be supervised by national supervisors, however subject to the single supervision
framework enacted by the ECB. We are working very intensely to meet this deadline,
together with the national competent authorities in all euro area countries. In order to ensure
a clean and sound start, the ECB has also designed a comprehensive assessment to restore
the health of the banking sector and confidence in it. As announced by the ECB on 29 April,
banks will be expected to cover capital shortfalls within six to nine months after the
disclosure of the results. The EBA will be closely associated to this exercise which has to be
fully in line with the Single Market to ensure that the EU financial system as a whole will be
revitalised.
Let me also say a few words about the second element of Banking Union that has been
agreed in March: the Single Resolution Mechanism. The SRM, together with the rules of
the BRRD, will provide a comprehensive framework allowing banks to be wound down in an
orderly way in the future. If the resolution of a bank requires additional resources after bail-in,
they will not come from public budgets but from a fund that will be financed by the banking
sector. Such a system will shield taxpayers from having to pay again for the mistakes made
by private banks.
Both elements of the banking union remain open to Member States which do not share the
single currency. In other words, any co-owner of the house willing to participate in the
construction of the additional floor is welcome to join. Forming part of strong and unified
institutions for supervision and resolution clearly have direct benefits also for Member States
that have not (yet) joined the euro area.
Those wishing to stay on the ground floor are free to do so. At the same time, I see it is very
much in their interest that a solid floor is being built upstairs as they would immediately feel
the consequences of a weak construction. The crisis has shown that financial instability in
the euro area can negatively affect non euro area Member States.
Of course, safeguards have to be implemented to ensure consistency between this new
construction and the ground floor - and thereby stability and harmony in the whole house.
This is what has been done with the revision of the EBA regulation simultaneously with the
adoption of the SSM regulation. The banking union project is about reinforcing, not dividing,
the Single Market. However, such safeguards, which do have a bearing on the design of
euro area integration, should not prevent euro area members from taking the decisions that
are necessary for the smooth functioning of EMU.
To sum up, a lot has already been done over the past five years to draw the lessons of the
financial and sovereign debt crisis. But this is not the end of the process.
As most of you are lawyers, you know very well that once legislation has been enacted,
implementation by the relevant authorities is equally important. At the European level, the
agreed tools and procedures have to be fully enforced by the Commission and the Member
States. This applies in particular in the field of economic governance. At the national level,
Member States have to adjust their domestic regulatory framework to the new European
environment. Enjoying the benefits of being part of the banking union should come together
with the adequate responsibilities. In some cases, the timeline for implementation is
ambitious and requires speedy and determined action by national authorities: for example,
the main provisions of BRRD need to be transposed until 31 December 2014. A number of
Member States, including smaller ones, have to close a number of outstanding gaps and
loopholes.
Further legislative action is necessary to complete the single market for financial
services
Let me now turn to the next five years and the legislative agenda for the EU. I see a number
of areas where further progress is required in order to complete the Single Market for
financial services. This would benefit all 28 Member States: if I may use again the metaphor,
solidifying the walls of the ground floor is in the interest of all co-owners. But it may be even
more important for those involved in the construction of the additional floor, i.e. the euro area
Member States.
Two major legislative proposals which are highly symbolic for citizens as an EU response to
the crisis are now on the table and need to be carefully analysed against their potential
benefits and drawbacks. Let me mention first the Commission's proposal on structural
measures for banks. A few years after the start of the crisis, assessing the banking sector's
structure and reflecting on how to make banks safer is essential. A coherent approach would
contribute to reducing the potential fragmentation caused by different national structural
regulations. Nevertheless, the devil is in the detail when implementing such reform,
especially because the potential benefits are still untested. Second, in a different domain, the
ECB shares only some of the objectives that have motivated the proposal for a Financial
Transaction Tax (FTT), for example further integration of the single financial market and
increased financial stability. However, as you know, the FTT is currently discussed among
only 11 countries which have decided to enter into an "enhanced cooperation" on that
specific issue. As all Member States will not be part of this arrangement, it should be ensured
that the planned tax would not have unintended side effects such as hampering the
transmission of the single monetary policy and the smooth functioning of settlement systems.
In particular, a coherent approach with countries which are not part of the enhanced
cooperation is vital to avoid regulatory arbitrage.
The crisis has also spurred discussions on how to better bring the financial sector back to its
core mandate: being at the service of the real economy. I strongly believe that more can
be done to unlock affordable financial resources for European SMEs. As 99.7% of firms in
the EU are SMEs, euro area economies' well-being is intertwined with the financial health of
SMEs. By assisting banks' ability to fund and distribute risk the securitisation of SME loans
could contribute to connect the financing needs of SMEs with the funds of investors who
would otherwise not invest in those SMEs.. Looking forward, at least three steps are
necessary. First, more work should be done to distinguish 'high quality' segment of the ABS
market and make them more robust to market stress, thereby providing banks with a more
resilient form of funding. Second, available data and general standards applied to all ABS
should be further improved. Third, the regulatory treatment of securitisation should be
revised to better reflect the risk-mitigating features of high quality securitisation and to
address current inconsistencies in the legislation.
More generally - going beyond the notion of banking union, we should work towards creating
an integrated financial market union that supports the real economy. This requires in
particular two elements: developing cross-border capital markets offering a real alternative to
banks' financing; and ensuring that banks are able to operate smoothly across borders and
to undergo mergers and acquisitions without any national bias.
In this context, let me also focus on what is often referred to as the plumbing of the financial
sector, that is, the Single Market for payment and cross-border securities settlement.
Harmonisation is key to ensure that both the Single Market and the single currency function
smoothly. The ECB has delivered an important contribution in this regard. In the early 2000s,
the Giovannini reports identified 15 barriers to efficient clearing and settlement across
national markets in the EU. For quite a long time, there was no progress in removing these
barriers. This is about to change significantly with a common settlement platform and a
common set of rules. TARGET2-Securities (T2S) will go live in June 2015 and will be the
common securities settlement platform of 24 CSDs, both inside and outside the euro area,
for settlement in central bank money. The CSD Regulation will enter into force in early 2015
and complement from a regulatory perspective what the single platform T2S ensures from a
technical perspective.
Harmonisation is also essential with regard to retail payments. This is an area where
citizens can see the tangible benefits of the Single Market in their everyday life. Soon, we will
migrate to the common European schemes that have been developed for credit transfers and
direct debits. Whether you make a bank transfer within Luxembourg or from Luxembourg to,
say, Finland or Portugal, this will not make any difference. The recent proposals of the
European Commission for a revised Payment Services Directive and for an Interchange Fee
Regulation should also be adopted swiftly. When implemented, they will significantly
enhance integration in the market of card payments. That said, a lot remains to be done,
including in the field of technical standardisation, to support that objective.
How to develop further the institutional framework of EMU
Allow me now to go beyond the area of financial sector policies and take a broader look at
the future of the EU and in particular of the euro area. In 2012, the Report by the four
Presidents of respectively the European Council, European Commission, the Eurogroup and
the European Central Bank identified four building blocks of a genuine EMU: banking, fiscal,
economic and political union. The banking crisis made the first building block, the "house" I
referred to, a priority. However, we must not forget that much remains to be done on the
three other construction sites.
In the longer term, it seems appropriate to reflect on the limits of the current framework in
which we are evolving. A Treaty change could enlarge our horizon of possibilities.
As regards fiscal union, the Four Presidents' Report mentioned the need for true oversight
over national budgets. The consequences of misguided fiscal policies in a monetary union
are too severe to remain self-policed. Beyond the recent reform of fiscal governance, the
euro area centre could be endowed with veto rights over those national budgets that violate
the European rules.
As regards economic union, the euro area needs to achieve a higher degree of economic
convergence, in terms of competitiveness, growth potential and flexibility. This is essential for
each individual country and for the smooth functioning of the euro area as a whole. The
framework for policy coordination should be made more stringent and enforceable at
European level. At the same time, due attention should be paid to fostering national
ownership of the necessary reforms.
Progress in these fields would require commensurate steps towards political union. In view
of the multiple geometries implied by the EU integration process, the need for an enhanced
political dimension is even more pressing for the euro area. Sharing a single currency implies
a substantial sharing of sovereignty and economic integration, going well beyond the
requirements of a single market.
There are a number of possible options to enhance effectiveness and legitimacy of
decisionmaking in the euro area. For example, a permanent Eurogroup President as the nucleus for
a euro area Finance Ministry with proper analytical capacity and more autonomous
decision-making powers could be a step in the right direction. This could be accompanied by
stronger accountability towards the European Parliament, in particular for the implementation
of the governance framework, for example in a euro-area sub-committee of the European
Parliament.
Let me conclude by broadening again the scope of our discussion and coming back to the
founding declaration of 1950. Going beyond the establishment of a common economic
system, the EU project was from the beginning aiming at creating a deeper community of
Member States. Recent progress in the financial and economic field should not make us
forget that citizens also expect Europe to deliver on broader public goods such as internal
and external security. The Single Market and the EU's "four freedoms" (i.e. free movement
of goods, capital, services and people) have brought new challenges for law enforcement
authorities. Moreover, the fragility of external security, especially at the borders of the EU,
remind us that, as put forward by Schuman in 1950, "world peace cannot be safeguarded
without the making of creative efforts proportionate to the dangers which threaten it". It
requires going beyond the economic foundations of the European project.