Mario Draghi: Hearing at the Committee on Economic and Monetary
Affairs of the European Parliament
Introductory statement by Mr Mario Draghi, President of the European Central Bank, before
the Hearing at the Committee on Economic and Monetary Affairs of the European
Parliament, Brussels, 9 October 2012.
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Madam Chair,
Honourable members of the Committee on Economic and Monetary Affairs,
It is a pleasure to be back here in Parliament and in front of your Committee for our regular
exchange of views.
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As you know, the European Central Bank (ECB) has recently taken important
decisions to address severe distortions in government bond markets. The ECB
stands ready to undertake, under appropriate conditions, what we have called
outright monetary transactions (OMTs). These provide a fully effective backstop to
avoid destructive scenarios that might threaten price stability in the euro area.
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Our OMT announcements have helped to support financial market confidence. The
ECB's actions can help to build a bridge. But the bridge must have a clear
destination.
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Reaching that destination involves three processes: first, full implementation of fiscal
consolidation and structural reforms to enhance competitiveness; second, full
implementation of financial sector reform; and third, completion of a genuine
economic and monetary union. The establishment of a Single Supervisory
Mechanism (SSM) is a key step in these processes.
Today, I will review economic and monetary developments since July. I will then explain in
some detail the rationale and modalities of the OMTs. I will end by sharing my views on one
of the four building blocks of a genuine economic and monetary union, namely the financial
market union.
1. Economic and monetary developments
Let me start with the economy. Since our last meeting, the ECB has left its key interest rates
unchanged: the main refinancing rate stands at 0.75%; and the deposit rate at 0%; the
marginal lending facility at 1.50%;.
Economic activity contracted in the second quarter of 2012. Looking ahead, we expect weak
economic activity in the near term and only a very gradual recovery after that. The risks to
this outlook are on the downside, mainly related to the tensions in several euro area financial
markets.
Average inflation in the euro area stood at 2.7% in September, reflecting indirect taxes and
high energy prices. It should decline to below 2% in the course of 2013. Underlying price
pressures should remain moderate given modest economic growth and well-anchored
long-term inflation expectations. Risks to the outlook for price developments are broadly
balanced.
Our monetary analysis paints a picture consistent with price stability. In particular, the
underlying pace of monetary expansion remains subdued. Loan dynamics are also subdued
as a result of weak demand for credit but also restrictions on the supply of credit in some
euro area countries.
2. Outright monetary transactions (OMTs)
Let me now explain the decision announced by the ECB's Governing Council in September
on outright monetary transactions.
The impact on financial and monetary conditions of past reductions in key ECB interest rates
differed considerably within the euro area. For example, in some countries, following cuts in
key ECB interest rates, the rates charged by the banking system for credit to the real
economy have declined only a little, if at all. In other countries, ECB rate cuts have been fully
passed through.
One reason for this difference is that the cost of bank credit to firms is inevitably linked to the
cost of market funding for the banks themselves. If there are fears about potential destructive
scenarios, the cost of funding for banks can be affected asymmetrically across the euro area.
This means that two firms that are otherwise identical and have the same creditworthiness
have benefited to a different extent from past cuts in key ECB interest rates, merely because
they are located in different countries.
It is that distortion in financing costs that hinders the smooth functioning of credit markets
and the transmission of monetary policy. It is that distortion which keeps some countries in
what I have previously described as a "bad equilibrium". And it is that distortion which falls
clearly within our mandate to address.
To counter the impairment of monetary policy transmission and to preserve the singleness of
the ECB's monetary policy, the Governing Council decided to undertake outright monetary
transactions.
OMT interventions in government bond markets provide a fully effective backstop to avoid
destructive scenarios that might threaten price stability in the euro area. The aim is to ensure
that the ECB's monetary policy stance is transmitted more evenly to the real economy across
euro area.
The ECB will conduct OMTs if and as long as countries comply with strict and effective
conditions attached to an appropriate programme via the European Financial Stability Facility
and the European Stability Mechanism.
Conditionality preserves the primacy of our price stability mandate and ensures that OMTs
will not compensate for a lack of fiscal consolidation. Conditionality in particular preserves
the incentives for governments to continue with economic and fiscal adjustments. And only if
conditionality is fulfilled will the OMTs be successful in moving an economy towards what we
might call a "good equilibrium".
OMTs are ex-ante unlimited but, as I have just explained, they are not unconditional. Exit
from OMTs would take place once their objectives have been achieved or when there is a
failure to comply with a programme. OMTs would not take place while a given programme is
under review and they would resume after the review period once programme compliance
has been assured.
Consistent with the Treaty prohibition of monetary financing, the ECB will only conduct
transactions on secondary markets, buying from investors and not from governments.
Purchases will focus in particular on government bonds with remaining maturities of between
one and three years. This is in line with the traditional focus of central bank monetary
operations.
The ECB will accept the same treatment as private or other creditors with respect to bonds
purchased in the context of OMTs. And the ECB will be fully transparent on its OMTs. We will
report weekly on total portfolio holdings, and monthly on the average duration of our holdings
and the breakdown by country.
3. Financial market union
Let me now turn to the other topic you have chosen for today's exchange of views, namely
the financial market union.
The ECB welcomes the European Commission's proposal for a Single Supervisory
Mechanism, which is very much in line with the statement of the euro area summit of
29 June 2012. We are looking forward to working closely with the European Parliament in
this field. I am confident that the excellent cooperation we have established so far will
continue with matters of financial supervision.
Let me here focus on three issues that are key to setting the stage for the new supervisory
framework in the euro area: first, the principle of separation between monetary policy and
financial supervision; second, the possible participation of non-euro area Member States in
the SSM; and third, the accountability framework.
On the first issue of the separation of monetary and supervisory functions, we are not
entering uncharted territory. Many central banks around the world - including a large majority
of the national central banks in the Eurosystem - combine monetary and supervisory
functions.
Proper arrangements to prevent monetary policy being inappropriately affected by the
supervisory role have been devised in several countries. I am confident that we can establish
suitable arrangements in the euro area, drawing in part on their experiences.
The Commission's proposal provides a solid basis for achieving that goal. By having the
Supervisory Board carry out all regular supervisory activities performed directly by the ECB,
we will go a long way towards avoiding possible conflicts of interest between the two
functions. In addition, we are examining internal procedures that would separate the relevant
work-streams supporting the two functions.
The second key issue for the supervisory framework is the possibility of non-euro area
Member States participating in the SSM. Let us first take a step back and remind ourselves
that the key reason why we are building the financial market union is because of what is
happening in the euro area. We are building it to break the vicious circle between sovereigns
and banks, the manifestations of which are much more acute and disruptive in a monetary
union. That is why we need the SSM in the single currency area.
At the same time, it is clear that we have to create the financial market union while sustaining
- and even strengthening - the single market. Both the single currency and the single market
are key pillars of growth and prosperity in Europe. Both should be maintained - indeed, both
should be enhanced.
The ECB welcomes the possibility of involvement of non-euro area Member States in the
SSM. The participation of additional Member States would provide an even stronger boost to
the completion of the single market.
That being said, for an entity such as the ECB, whose key legal powers and key
decision-making fora are limited to the euro area, imposing obligations on - and granting
corresponding rights to - non-euro area Member States raises a number of legal issues. Our
legal services - together with those of the Commission and the European Council - are
examining closely the possible modalities of participation of non-euro area Member States
within the legal constraints of our Statute.
The third key issue for the supervisory framework is one that I suspect is particularly close to
your hearts: how the ECB will be accountable for its supervisory actions to the citizens of
Europe and their elected representatives. While the independence of the supervisory
function is important, so is its accountability. They are, after all, two sides of the same coin.
Given the nature of the tasks of supervision and the need for operational cooperation with
other authorities - notably where fiscal costs are concerned - separate and robust
mechanisms of accountability have to be in place to legitimise the high degree of
independence. The Commission proposal foresees, in particular, that the SSM will be
accountable to the European Parliament and the European Council.
Questions have been raised about the timeline for when we should begin our supervisory
tasks. Irrespective of the precise schedule for the performance of supervisory tasks, I believe
that it is very important that the Council Regulation enters into force as envisaged on
1 January 2013. This would allow us to start the preparatory work as swiftly as possible.
I have discussed the main aspects of the SSM. But the financial market union would be
incomplete without commensurate progress towards a common resolution regime. The lack
of such a regime has increased the cost of bank failures for taxpayers. It has also
complicated the handling of bank failures, especially in cross-border cases. A common
resolution regime - with an independent European resolution authority at its centre - is
crucial for managing crises in a way that is as orderly, effective and efficient as possible.
4. Concluding remarks
Let me conclude my remarks. The euro area is making good progress towards achieving
stable and sound foundations. I trust that in October and subsequently in December, the
Heads of State or Government will reaffirm their commitment to the irreversibility of the euro
by agreeing on a long-term vision for our economic and monetary union.
That process has not yet had a fully visible impact on the everyday life of citizens in the
countries suffering most from the crisis. I am well aware of the hardship that the current
situation entails for many people, especially those whose job is lost or at risk.
The adjustment process towards sustainable public finances and a competitive economy can
be painful in the short term, both politically and economically. Yet, the reforms are necessary
corrections which will bring countries back on the path of sustainable growth. And they also
contribute to improve social justice, by fostering tax compliance and limiting rent-seeking by
vested interests.
I am confident that the euro area and its currently weaker members will emerge from the
crisis with stronger and better functioning economies - and that this will be to the benefit of
all Europe's citizens.
Thank you very much.