Yves Mersch: Advancing Monetary Union
Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank,
at the Euro Exhibition, Osnabrück, 25 January 2015.
* * *
Ladies and gentlemen,
Euro banknotes and coins are not just a means of payment. The bridges and arches on our
banknotes are a symbol of European integration. They stand for the fact that there is a lot
which connects us within the Monetary Union, and that our once so divided continent has
succeeded in overcoming these deep divisions, as the crisis has recently shown.
Our common currency also therefore stands for shared values. "Stability of institutions
guaranteeing democracy, the rule of law, human rights and respect for and protection of
minorities" have been some of the accession criteria for membership of the EU since the
European Council in Copenhagen in June 1993; "Membership presupposes the candidate's
ability to take on the obligations of membership including adherence to the aims of political,
economic and monetary union."1
The recently published legal opinion of the Advocate General of the European Court of
Justice in the case of Peter Gauweiler and the Die Linke party against the ECB on the
Outright Monetary Transactions (OMT) programme also refers to these constitution-like
shared legal values. This "constitutional compact" underlies European integration and
includes the German constitutional principle of constitutional identity review - it does not
exclude it.2
Recent expressions of solidarity from all over Europe following the barbaric terrorist attacks
on staff at the satirical magazine "Charlie Hebdo" in Paris show what a central role the rights
to freedom of speech and freedom of expression occupy in our system of values.
These values of freedom are central among those accorded great importance in newer
Member States from the former Eastern bloc. With the awareness that the common currency
within the EU is evidence of closer integration, the introduction of the euro - especially in
countries such as Lithuania most recently - is also perceived as a demarcation from, and
protection against, purportedly aggressive hegemonic powers.
This shows that the European Union and the euro area are far more than an amalgamation
of independent nation states.
Shared values are all the more important when the cement that typically holds together the
parts of a full political union is missing. Alongside a shared identity - a loose concept which
has sometimes been maliciously abused in the past, yet one which cannot merely be
reduced to a successful football team - or language, this is often long-term transfer
payments to even out differences in living conditions. Germany has this in the form of
horizontal financial equalisation among the federal states [Länderfinanzausgleich], as well as
transfer payments to the states of former East Germany, which are financed by the solidarity
surcharge [Solidaritätszuschlag].
It may well be that one day the political will considers fiscal transfers between the Member
States of the euro area necessary and desirable. However, that would then require a change
to the European treaties. There is no provision for a transfer union in the current Treaty. And
whether you like it or not, that applies to the front door as well as the back door.
This is something which those who call for more (financial) solidarity must realise. More
solidarity within Europe in this sense would also require more European control. But we don't
yet have a "euro area parliament" with the democratic legitimation for this, or a supranational
budget worthy of this name.
At the moment I see correspondingly little willingness from national parliaments to relinquish
their budgetary powers in order to centralise them at the European level. The flipside of this
coin, however, is that Member States, with their own national budgets, have
disproportionately more individual responsibility.
Even without financial transfers, there must be reasons why it is more attractive for Member
States to be part of the Monetary Union than to stay outside it. In addition, they must be
better off in the euro area than out. In concrete terms, membership of the euro should bring
more stability and prosperity.
In this respect, the Monetary Union has already taken considerable steps towards
integration. But a common internal market and a single monetary policy alone is not enough
to achieve this in the long run.
With stricter budgetary rules for euro area countries, a stability mechanism and banking
union, the Monetary Union is in a considerably better position today that it was at the start of
the crisis. But despite these steps towards integration we still can't speak of a completed
Monetary Union.
To sit back now, given what has been achieved, would therefore be wrong. Developing the
Monetary Union further is a permanent undertaking.
As a matter of principle, the prosperity of each individual country in a monetary union always
depends on the financial and economic policies of the other Member States. Member States
find themselves, as it were, in a community with a shared destiny. All governments are
therefore well advised if they take the other Member States into account and coordinate their
policies where appropriate. Member States thus not only need a common monetary policy,
they also profit when they share more sovereignty in other policy areas.
When I talk about "sharing sovereignty", this in no way means that Member States lose their
independent decision-making authority, let alone their national identity. On the contrary, the
more sovereignty Member States share, the more influence they can sometimes gain. Let
me illustrate this with an example.
Last year Lithuania's finance minister, Rimantas Šadžius, reportedly said, "we already have
the euro, it just has a different name". What he wanted to express by that was that
Lithuania's monetary policy was significantly shaped by the ECB. From 2002 the litas was
pegged to the exchange rate of the euro, and before that to the US dollar. On Thursday Vitas
Vasiliauskas, Chairman of the Board of Lietuvos bankas, was allowed to have a say for the
first time in the monetary policy of the second-largest economy in the world.
In times of highly interdependent national economies, sharing sovereignty means gaining
influence. And precisely this common decision-making for the benefit of all is a prerequisite
for Monetary Union being able to bring its members more stability and prosperity.
This is particularly true when it comes to creating a single European financial market. It is this
aspect which I would like to go into in more detail today. At the moment, as a logical
consequence of the banking union created last year, a capital markets union is under
discussion.
Why Europe needs a capital markets union
Europe's economy is characterised by small and medium-sized enterprises (SMEs). They
account for two out of three jobs and generate around 60% of value added. And precisely
these enterprises finance themselves almost exclusively via the domestic banking sector. In
most countries, however, the majority of loans to enterprises are granted by only a few
banks. That makes the economy vulnerable towards, and dependent on, this sector.
In the United States, on the other hand, it is quite usual for enterprises to obtain money
directly from the capital market. And not necessarily in the state in which they have their
headquarters. This form of corporate financing makes the economy much less vulnerable
towards any problems in the banking sector. It is, however, significantly underdeveloped in
Europe.
In a monetary union one should also expect a fully integrated capital market. That would
mean, for example, that a creditworthy entrepreneur from Osnabrück could issue a bond
without any problems in the Netherlands. Or an entrepreneur from Lisbon could do the same
in France. After all, France, Portugal, the Netherlands, Germany and 15 other countries
share the same currency.
A truly integrated capital market would not only benefit the European economy because it
would ensure an efficient and location-independent allocation of financial resources. It would
also bring with it a greater distribution of risk.
First, spreading risk means striving for a balanced financing mix. If Europe's enterprises do
not principally finance themselves with bank loans but also with, for example, corporate
bonds, the economy can still prosper when banks are rather hesitant in their lending.
Currently in Europe, however, only around 20-50% of debt financing takes place in capital
markets. By comparison, in the United States it is around 80%.
Now, we cannot expect to have a completely new financing mix in Europe from one day to
the next. That is why a healthy banking sector remains a prerequisite for SMEs to be able to
access loans. Over the medium to long term, however, the desire is not to have to rely on
this sector alone, but to foster alternative methods of financing, for example by appropriately
regulating the securitisation market.
Second, spreading risk means that financial markets within a monetary union should actually
function independently of national borders. Economic shocks can then be better absorbed
because countries receive a certain amount of protection from the private sector. If, for
example, part of a country's assets are held by foreign investors, these investors will also
bear a share of the consequences of an economic shock. Such shocks thus have a reduced
impact on the domestic economy. A country can also reduce its vulnerability to shocks by
holding a geographically diversified portfolio itself. Ultimately, integrated financial markets
help to cushion national shocks because companies and consumers can also fall back on
foreign capital markets and banks in times of crisis.
Such risk-sharing with the private sector works very well In the United States. According to
scientific estimates, around two-thirds of an economic shock are smoothed by capital and
credit markets.3 The European financial markets are much less effective at absorbing such
shocks and their ability to do so deteriorated even further during the course of the crisis.4
The design of a capital markets union - regulatory harmonisation and institutional
efficiency
The Commission will soon present a first proposal on what a capital markets union could look
like in practice. This proposal will then be submitted for public consultation. The details are
not yet known, but I would like to share with you some of my ideas about an effective capital
markets union.
For me, the term "capital markets union" means more than simply tinkering with existing
regulation. It means addressing areas that are politically sensitive as well, such as disclosure
requirements for companies, supervision of the financial infrastructure, insolvency law and
EU-wide harmonisation of capital gains tax regulation. We have already achieved a great
deal in the field of payment systems, having broken down barriers and significantly reduced
costs for citizens since we introduced the Single Euro Payments Area (SEPA), although the
existing legislation now needs to be implemented with full force. We want to do the same in
the medium term for the cross-border use of credit cards: in a monetary union, there should
be no "roaming" fees when it comes to making payments.
The basic principle of the free movement of capital goes back to the Treaty of Rome5 and
has enjoyed the same status as the other fundamental freedoms since the Maastricht Treaty.
I think it is time that we consider what regulatory and institutional adjustments have become
necessary since then so that we can take full advantage of the single capital market.
Turning first to the regulatory dimension, let's stick with our example of the entrepreneur in
Osnabrück. If his company wishes to issue a bond in the Netherlands, it will agree with the
investor whether the transaction is to be carried out under German or Dutch law. This initially
sounds like a relatively simple way to conduct cross-border financial transactions despite
divergent national legislation.
However, financial transactions are often far more complex than that. There might be an
entire chain of financial intermediaries, meaning that it is not clear for the final buyer what
his/her legal claims and property rights are. The account holder's legal position from the
moment a security is posted to his/her account varies substantially. In some countries, the
account holder has full and undivided ownership. In other countries, he/she has an "inferior"
legal position, i.e. he/she holds an indirect interest in a property or just a claim against the
account provider.
At the turn of this century, a group of financial market experts, led by Alberto Giovannini,
developed a number of suggestions as to how greater harmonisation in the EU financial
markets could be achieved. In two reports6, representatives of the private sector, the
European Commission and the European Central Bank presented concrete
recommendations on how, for example, regulatory barriers could be broken down.
Almost 12 years have now passed since the second report was published and some of these
proposals and recommendations have still not been implemented. For example, we still do
not have an EU-wide framework for the treatment of interests in securities.
Drawing once more on the comparison with the United States, a cross-border securities
transaction costs at least ten times as much in Europe as it does in the United States.
I think that makes it clear that Europe's economy has a lot to gain from dismantling the
relevant regulatory barriers as part of a capital markets union.
In addition to harmonised regulation for securities, we should also seek to implement a
harmonised legal framework for crisis management. The Council Regulation on cross-border
insolvency proceedings has provided a common regulatory framework governing, for
example, jurisdictions and the recognition of court judgements. But within this framework,
there are substantial national differences, such as regarding the extent to which various
stakeholders are protected in the event of an insolvency.
In my view, a single resolution framework for non-banks, i.e. central counterparties (CCPs; in
line with the Bank Recovery and Resolution Directive (BRRD)), is also part of a capital
markets union. We should also have a comprehensive resolution regime for central securities
depositories (CSDs) in order to level the playing field for banks and non-banks.
Those are just a couple of examples. In general, what is important is that financial market
regulation be harmonised so that a single European capital market can function smoothly. It
is very important to keep in mind that harmonisation and standardisation are not the same
thing as seeing everything at par or interfering with cultural identities. You can use a
computer in any of the Member States and the connections are configured in such a way that
I can exchange keyboards with different language layouts without any problems. This
technical standardisation does not therefore stand in the way of language diversity.
But harmonised regulation alone is not enough. We also need institutional adjustments.
If - as in the case of the capital markets union - regulation is to be implemented and applied
so that the same conditions prevail throughout the whole EU, then there are, in my view, two
main approaches.
The first is where the legislator creates strict rules that leave no room for interpretation. They
can then be implemented and applied in a decentralised manner, i.e. at national level, with
the result that institutional adjustments are not essential. Alternatively, the legislator may
wish to draw up more flexible regulation. In this case, a supranational authority would be
needed to ensure that this regulation is interpreted and applied in the same way across all
Member States.
Finding this balance between discretionary powers and centralisation comes to the fore, for
example, in the context of supervision of securities markets, instruments and market
infrastructures. Day-to-day supervision is currently largely done at the national level. We
should consider whether this is still appropriate and what role the European supervisory
authorities will play in the future. Their tasks and responsibilities are currently being reviewed
in Brussels.
Closing remarks
As you see, the capital markets union is a bigger project that cannot be implemented
overnight, not to mention the progress that is still needed in terms of integration in other
political areas.
But this should not discourage us from getting started on it. Political scientists would tell you
that it is completely normal that we didn't have a fully accomplished currency union from day
one and that we still don't have it today. Hardly any international agreement was as
ambitious at the first attempt as some of the negotiators would have perhaps liked. The
United States also needed many decades and went through several crises before its
currency union achieved its current form.
The "Four Presidents' Report" (European Commission, European Council, Eurogroup and
ECB) presented to the Heads of State or Government in 2012 discusses the need to
complete the Economic and Monetary Union. This includes considering a fiscal union and
even a political union, which are difficult topics and ones that I have not touched upon today.
Let's remind ourselves that Europe's Heads of State or Government already "laid the
foundation for completion of the European Union" with the Maastricht Treaty. This Treaty,
according to former German Chancellor Helmut Kohl, marked "a new, decisive step in the
process of European integration that in a few years will lead to the creation of what the
founding fathers of modern Europe dreamt of after the last war: a United States of Europe."7
It is time that this affirmation resulted in action.
A completed Union would not mean that Member States give up their national identities.
Quite the contrary: they bring their national identities with them into the euro area. That is
why we speak of "unity in diversity". The Euro Exhibition illustrates this: while one side of our
coins all share the same design, each Member has its own country-specific design for the
reverse side. These designs often bear symbols of national identity, such as Milda, the
symbol of freedom, who features on the Latvian euro coins. But go and take a look for
yourself! I hope you will enjoy the exhibition. My thanks go to the Deutsche Bundesbank and
the City of Osnabrück for inviting me to today's opening event.