Benoît Coeuré: Consolidating the euro area's economic recovery
Introductory remarks by Mr Benoît Coeuré, Member of the Executive Board of the European
Central Bank, prior to an informal exchange of views with the European Affairs Committee
and the Finance Committee of the National Assembly, Paris, 13 May 2015.
* * *
Madam Chairman,
Mr Vice-Chairman,
Ladies and Gentlemen of the National Assembly,
Thank you for the opportunity to address you today.
The National Assembly, like all of the national parliaments, plays a vital role every day in the
necessary interaction between national and European institutions. The effectiveness of our
policies is in the balance: our economies are too interdependent for us to turn our backs on
one another. Our legitimacy is also in the balance: European strategies and decisions that
require national political involvement cannot be effectively implemented unless they are fully
understood and supported by the Member States.
I know that your committees pay close attention to economic developments in the euro area
and to the European Central Bank's decisions. These will be the crux of my introductory
remarks. I also want to hear what you have to say and take your questions, because
Economic and Monetary Union is an ongoing project. The crisis showed us that we need
more coherent economic policies and a stronger institutional foundation for the euro area.
1. The ECB's monetary policy during the crisis
During the crisis, the European Central Bank was confronted with considerable challenges.
The first was to maintain confidence in the single currency amid tremendous financial
instability and uncertainty.
The second was to maintain price stability despite financial fragmentation in the euro area.
And the third was to combat the risk of prolonged weakness in inflation at a time when all of
the ECB's conventional instruments had already been used.
These challenges guided our actions in pursuit of our price stability objective.
This led to an unprecedented accommodative stance in our monetary policy, a stance carried
out via a wide range of measures, some conventional and others unconventional.
As you know, the principal channel used to implement conventional measures, those used by
central banks in normal times, is the interest rate channel. In response to weak growth and
inflation, we lowered our key interest rates to their lower bound. By doing so, we reduced the
cost of borrowing in order to support investment and consumption.
To amplify the impact of the rate cuts, we also issued forward guidance on the likely path of
key interest rates. This transparency allowed us to keep short-term interest rates in the euro
area low and stable, which suited conditions in the euro area, despite the pressures seen on
international capital markets.
However, the lack of confidence in certain Member States in the financial system and in the
solvency of sovereign borrowers was an impediment to the transmission of monetary policy
to the broader economy during the crisis. In countries gripped by financial difficulties,
financing conditions remained restrictive, despite the easing of monetary policy.
To restore uniform monetary policy transmission and tackle the risks to price stability, the
ECB thus needed to combine conventional measures with unconventional measures tailored
to the particular situation in the euro area. The ECB pursued this strategy throughout the
crisis.
We initially sought to make sure that banks could refinance themselves under good
conditions so that they could continue to finance the economy. The Governing Council, for
example, decided to supply banks with unlimited liquidity at a fixed interest rate, to
significantly extend the maturity of our refinancing operations and to expand the list of assets
eligible for use as collateral.
When fears regarding the euro area's integrity surfaced at the height of the crisis, in
August/September 2012, the Governing Council created Outright Monetary Transactions
(OMTs). These monetary transactions made it possible to intervene, if needed, in secondary
sovereign debt markets in the event of a speculative attack, notably one linked to single
currency fears. They were conditional on the establishment of a financial aid programme
under the European Stability Mechanism, which would constitute an indication of confidence
in the economic convergence and fiscal viability of any country in which we would be called
upon to intervene. This decision led to a dramatic decline in the risk premia on sovereign
yields, notably those of Italy and Spain. Thus, it contributed to the efforts undertaken in the
euro area, which also involved the creation of the banking union, to break the vicious circle of
sovereign risk undermining banks' stability and thus their ability to finance the real economy.
The OMT tool has not been used, but it still could be if fears of the single currency's integrity
resurface.
More recently, to help stimulate the flow of financing to the economy, the Governing Council
decided on new unconventional measures to support the provision of credit. We gave banks
access to five-year refinancing operations on the condition that, in exchange, they boost their
lending to the real economy. In September 2014 we also established a programme to buy
covered bonds and asset-backed securities directly linked to the financing of the real
economy.
Together, these measures have already helped - and continue to help - ease financing
conditions in the euro area.
2. Expanded asset purchase programme
Despite this progress, the growing threat of prolonged weakness in inflation has made new
measures necessary. As a result, in January 2015 the Governing Council decided to launch
an expanded asset purchase programme.
At a time of weak domestic inflationary pressures, the steep drop in oil prices from mid-2014
onwards caused inflation to weaken further. Moreover, an extended period of excessively
weak inflation can affect inflation expectations and thereby become self-perpetuating.
A firm monetary response was needed.
Thus, we decided to expand our asset purchase programme.
The combined purchases of public and private sector debt will amount to €60 billion per
month. They began in March and are expected to continue until the end of September 2016.
In any event, they will continue until the Governing Council sees a sustained adjustment in
the path of inflation that is consistent with its goal of achieving rates below, but close to, 2%
over the medium term.
How does this asset purchase programme affect the real economy, and thereby, inflation?
The first transmission channel is that of confidence. The purchases put inflation back on a
path consistent with a pace of close to 2% over the medium term and give the confidence
boost needed for a recovery in private investment, which remains too far from its pre-crisis
level (16.8% of GDP in 2014 compared with 19.9% in 2007 in the euro area).
A second transmission channel involves lowering sovereign bond yields, which are used as a
price-setting benchmark for a wide range of private sector financial instruments, such as
bank loans to households and businesses.
Thirdly, the large amounts of liquidity injected through these purchases will allow private
investors (banks and non-banks) to undertake portfolio shifts into other financial assets,
particularly loans to the economy. This will lead to more favourable conditions for all
instruments used to finance the economy.
Lastly, the easing of financing conditions also influences the exchange rate, although this is
not an objective in and of itself.
Where do we stand with respect to the programme's implementation? We have begun
purchasing securities with no major difficulties, and the pace of monthly purchases is
consistent with the stated target. The positive impact of our most recent measures on the
financing of the real economy can already be seen. Bank lending rates have fallen by 40 to
50 basis points since summer 2014, and they should continue to fall, in the wake of the steep
drop in sovereign yields.
Lower financing costs for businesses and households are expected, in turn, to support
growth in lending and investment. In fact, the contraction in lending appears to be reversing
in the euro area. Bank lending to non-financial corporations grew 1% year on year in the first
quarter, compared with a 2% decrease the year before. In France, year-on-year growth in
lending to businesses came to around 4% in March, compared with just 1% a year earlier.
In light of these improvements, euro area growth projections and inflation expectations have
both been revised upward. The macroeconomic projections produced by ECB staff in March
2015 predicted euro area growth of 1.5% in 2015, 1.9% in 2016 and 2.1% in 2017. Growth
will be supported by rising external demand, lower oil prices and the accommodative
monetary policy stance. The first-quarter euro area growth figures released on 13 May
confirm this trend. Inflation is expected to gradually return to a level below, but close to, 2%
by 2017. This trend reversal is already evident in the upswing in inflation expectations seen
on financial markets.
3. Finishing the job: from a cyclical recovery to a structural recovery
Despite these positive signs, the recovery remains insufficient and uneven.
The factors supporting growth today are temporary in nature. Serious risks remain at the
international level. The recovery is chiefly supported by the euro's depreciation and lower
energy costs, whose effects will diminish over time. This is also true of monetary policy,
which cannot have a lasting impact on an economy's long-term growth trend. It is up to euro
area governments to act so that the recovery is more than a flash in the pan and long-term
growth takes over from cyclical support factors.
The euro area's unemployment rate remains very high, at 11.3% in March, and has reached
unacceptable levels in several countries. In some countries, more than half of young people
in the labour force are out of work. This situation is largely structural in nature1 (structural
unemployment is now over 10%). Furthermore, given the low level of potential growth,2
strongly undermined by the crisis and estimated at under 1%, there are clear priorities for
reform from the ECB's standpoint: encourage productive investment, improve employment
rates and training, and restore the overall productivity of inputs by reducing barriers to entry
and to innovation and by improving economic conditions for companies. These are the
priorities that the Governor of the Banque de France laid out in his letter to the President of
the French Republic.3 It is not the role of the ECB to say specifically how these reforms
should be designed and implemented.
A chief complaint is that structural reforms hurt growth and employment in the short term. I
would counter that if reforms are ambitious, complementary and credible,4 they will elicit
expectations of a sustained period of higher income, encouraging households to increase
consumption and businesses to invest.
Recent European Commission forecasts show that euro area countries that have pursued
the most ambitious reforms, such as Spain, are now experiencing stronger growth. The
countries that reform the most will benefit the most from our accommodative monetary policy.
In terms of fiscal policy, here again it is not the role of the ECB to say specifically what
countries should do, but I want to remind you of three simple tenets that we think are
extremely important.
First of all, the Economic and Monetary Union is a community of interest founded on a
capacity for joint action and the application of rules. Rules can change, a point I will come
back to, but first they have to be applied. It is a question of mutual trust, and in this the larger
countries must set an example.
Second, managing macroeconomic conditions in the euro area means paying just as much
attention to the fiscal situation in each country to which the rules apply as we do to the area's
overall fiscal situation: "all for one and one for all". From this standpoint, our recommendation
is clear. The fiscal stance of the euro area as a whole (measured, for example, by the
change in the structural budget balance) is neutral overall, and in our view is suited to the
current economic situation, but the room for manoeuvre in individual countries differs greatly.
Countries in excessive deficit situations must continue their efforts, and those with some
leeway can use it, particularly to encourage investment.
Lastly, the composition of the fiscal adjustment is of the utmost importance. Better targeted
spending, notably on investment, the public sector portion of which fell during the crisis (from
7.1% of public spending in the euro area in 2007 to 5.5% in 2014), will create more growth
and more jobs.
4. Strengthen the euro area's institutional foundations
In countries that share a single currency, economic policies are a point of common interest.
This is in the economic interest of the Member States and is also a legal obligation: the
Treaty on the Functioning of the European Union is clear on this point. This is a necessary
condition if we want to fully benefit from monetary union and, at the same time, remedy the
structural, fiscal and financial weaknesses within the euro area: the crisis showed us that
local fragilities quickly become everyone's problem. On the flip side, our monetary policy and
banking union have shown the power of joint action. It is a lesson we must not forget.
The crisis has already led to major progress on institutional matters, such as the
establishment of the European Stability Mechanism or the banking union, with a Single
Supervisory Mechanism and a Single Resolution Fund based on common rules. These two
achievements have played a key role in strengthening monetary union during the crisis.
The establishment of the banking union is also an example of an institutional process
allowing the sharing of risk, which followed several steps.
First: political agreement on European legislation laying down common rules and putting an
end to bank sector abuses. I am thinking specifically of strengthening capital at systemically
important banks, bail-in rules that will eventually rid the banking sector of the practice of
"privatising profits and socialising losses", and - I hope - application at European level of the
principle of bank structural reform, which the ECB supports.5
Second: shared institutions incorporating national institutions that ensure the credible
implementation of those rules for the prevention and resolution of crises. The ECB is a
demanding bank regulator, freed from the hindrance of national interests. Third: a
transparency and convergence exercise aimed at resolving the fragilities of the past. And
finally: clear political legitimacy and an obligation to answer both to the European Parliament
(for the President of the ECB and the Chair of the Supervisory Board) and to the national
parliaments (for the competent national authorities).
It is now important to identify the areas where additional progress is required in order to
ensure the coherence and cohesion that is necessary for the effective functioning of
Economic and Monetary Union. In particular, I believe it is essential that monetary union is
more resilient when faced with shocks and fosters all of the potential benefits of integration in
terms of European prosperity. This means moving towards more effective economic
structures,6 but also exploiting the economies of scale and risk-sharing that are made
possible by integration.7 Such economic risk sharing involves chiefly the development of
larger and more stable internal markets,8 as well as rules that protect European consumers
and workers within these larger markets, and lastly, a more ambitious fiscal union.
It is true that this development implies sharing our sovereignty. But sharing sovereignty does
not mean losing it; in fact, it is a way of regaining it. And a shared European sovereignty on
the basis of democratically accountable common institutions allows us to go beyond a
system based on rules by recreating a space for political debate.
It is not the task of the ECB to lay down the details of these reforms, whose nature is
eminently political. But it is our duty to warn that the construction of the euro area is
incomplete. We are only half-way there. Stopping now would mean that we would be
responsible for leaving our Economic and Monetary Union in a lasting state of fragility, which
the economic recovery could only temporarily conceal.
The "Four Presidents Report" (by the Presidents of the European Council, the European
Commission, the European Central Bank and the Eurogroup), which is in the process of
being prepared, will reflect on the progress that needs to be made with Economic and
Monetary Union. I hope that this report will set out an ambitious vision of the future of
Economic and Monetary Union, without neglecting the pragmatic steps that are possible in
the short term without Treaty change, notably to improve economic policy coordination and
the functioning of the European Semester.
We must now seek to put this to its fullest possible use. I know that some have construed the
European Semester, and especially its country-specific recommendations, as the European
Commission meddling in national economic and fiscal policy, which they equate with a loss
of sovereignty. I do not share their view. In an Economic and Monetary Union that is still
incomplete, it is vital that authorities at both the national and the European level take
responsibility for treating economic policies as a question of common interest. The objective
is not coordination for coordination's sake. It is an open debate among the Member States on
the areas in which each of them must make progress to strengthen the Economic and
Monetary Union as a whole and, finally, a joint decision by the Member States on what to
recommend to each of them. However, it must also be clear that once the decision is made
by the Council of Ministers, all participants at both the European and national level have a
responsibility to make sure that the recommendations are fully incorporated into the legal and
regulatory framework. Previous efforts have been disappointing in this respect, and I hope
that the 2015 round, which begins today with the announcement of planned
recommendations by the European Commission, will be different.
The National Assembly has an essential role to play in this context and in the process of
strengthening Economic and Monetary Union.
Thank you for your attention. I am now at your disposal for questions.