Benoît Coeuré: Drawing lessons from the crisis for the future of the euro
area
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
at "Ambassadors Week", Paris, 27 August 2015.
* * *
Your Excellencies,
Thank you for your invitation. Here in the ministry where Robert Schuman made his historic
declaration on 9 May 1950, everyone understands that the European project is inextricably
an economic and political project.
The same is true of the euro. The single currency reflects a political desire to unite Europe
and aims to reap the benefits of a larger and better integrated economic area to support
growth and job creation.
The current crisis represents a fundamental test of our monetary union's ability to achieve
that dual objective, and it seems to me that there are two lessons that we should learn from
it.
The first is that the people of Europe and their governments are far more attached to the
single currency than certain observers have suggested.
The second is that our institutional framework is not yet sufficient to complete Economic and
Monetary Union when it comes to economic, fiscal and financial matters. The ECB does not
currently have a strong political counterpart in these areas. Thus, our monetary union will
remain imperfect, will not be as prosperous as it could be and will face the risk of repeated
crises if we fail to address our economic and political differences.
As the authors of a recent article entitled "Monnet's Error?" concluded, the European project
is on hold: "There is no desire to go backward [and] no interest in going forward, but it is
economically unsustainable to stay still."1
I would like to say a few words today about the major challenge that this poses and what we
can do about it.
1. The paradox of the euro during the crisis
It should be noted, first of all, that the euro has proved to be something of a paradox:
confidence in the single currency remains very high, despite the fact that the euro area is
struggling to emerge from the crisis and the fragilities of our economic and political union
have threatened the integrity of the euro area on several occasions.
a) Confidence in the single currency
During the crisis, certain observers have underestimated the extent to which the people of
Europe and their governments support the euro.
In spring 2015 a very large majority of the population of the euro area was in favour of the
single currency.2 69% of respondents to the Eurobarometer survey were in favour of
Economic and Monetary Union and the euro, 25% were against it and 6% were undecided.
That figure of 69% is close to the highest value recorded since 2004 for that question (which
stands at 70%).
The countries of the euro area have also reaffirmed, on several occasions, their commitment
to the euro and their determination to preserve our monetary union. On 13 July they made it
clear that they wanted Greece to remain in the euro area. Indeed, not only has the euro area
not shrunk, as some people have forecasted, it has actually grown in size. The figures speak
for themselves: the number of member countries has increased by almost 50% since the
start of the financial crisis, rising from 13 to 19.3
The rest of the world has also maintained its confidence in the euro. The single currency
continues to play a key role at international level, remaining one of the world's two major
currencies,4 and its share of global foreign exchange reserves has remained broadly
unchanged since the crisis began in 2007.5 This year, against the background of the
historically low interest rates in the euro area, the euro has been increasingly used as a
funding currency by international borrowers.6 And in April 2015 Mexico became the first
sovereign state to issue a bond denominated in euro with a maturity of 100 years.
There are several different factors that could explain that confidence in the single currency.
First of all, the euro forms an integral part of the European identity.7 It is also considered to
guarantee stability (by protecting purchasing power) and provide protection against the risk
of exchange rate crises. This aspect is directly linked to the credibility of the ECB's monetary
policy, which has demonstrated its ability to act to maintain price stability. Finally, sharing a
currency establishes common interests, from both a financial and a geopolitical perspective.
We can build on that confidence in the euro in order to strengthen our monetary union. The
ECB's fundamental objective is to protect the euro, hence it is imperative that we fulfil our
mandate by keeping inflation below, but close to, 2%, which explains all of our monetary
policy decisions during the crisis.
b) The fragilities of our economic union
At the moment, however, there is no such confidence in our ability to fully reap the economic
benefits of our monetary union and ensure stability and growth in the euro area. In the spring
of 2015, 45% of respondents in the euro area said they believed that the worst of the crisis
was yet to come.8
3
Malta and Cyprus joined the euro area in 2008, followed by Slovakia in 2009, Estonia in 2011, Latvia in 2014
and Lithuania in 2015.
4
European Central Bank, The international role of the euro, July 2015.
5
At constant exchange rates, the euro's share of global foreign exchange reserves has fallen by 1 percentage
point (to 22%) since the end of 2007, while that of the US dollar has declined by 5 percentage points (to 63%).
Thus, the decline in the share of the euro at current exchange rates is essentially a reflection of the euro's
depreciation over that period. In 1998 the combined share of the national currencies that preceded the euro
stood at 15%.
6
Accounting for almost 30% of new issuance.
7
A Eurobarometer survey conducted at the end of 2014 for the European Parliament found that the euro was
the most important element of the European identity (being mentioned by 50% of respondents in the euro
area), ahead of the values of democracy and freedom (49%), culture and history. See European Parliament
Eurobarometer 82.4, Question QP11, January 2015.
8
According to the spring 2015 Eurobarometer survey referred to above. In the European Parliament
Eurobarometer survey, 51% of respondents said that having the euro had not mitigated the negative impact of
the crisis. Finally, in a survey conducted by Opinium Research between 29 June and 10 July 2015, 63% of
respondents in the euro area (a sample of more than 6,000 people living in France, Germany, the
Netherlands, Italy, Spain and Portugal) said they thought that the Greek debt crisis had been handled badly at
European level.
The crisis showed that excessive imbalances and fragilities had been allowed to develop in a
number of euro area countries in the absence of sufficient safeguards: investment in the
housing sector instead of the productive economy, excessive risk taking in the banking
sector and massive external indebtedness. Participating countries have taken the benefits of
the euro for granted without acknowledging their shared responsibility.9 The negative effects
of this process became brutally apparent during the euro area sovereign debt crisis, and
even now, five years after that crisis began, they are still weighing on economic activity and
employment.
The consequences are not just economic; they are also political. In the worst affected
countries, convergence in GDP per capita has been reversed, casting doubt on one of the
fundamental objectives of the single currency.10 Unemployment hits the young hardest,
creating a lost generation. What is more, recent studies have shown that increases in debt
and unemployment in one euro area country affect confidence in the EU in other Member
States as well.11 This is an additional element of the interdependence that the single
currency has created among the countries that use it.
c) An imperfect political response
Thus, we have a shared interest in resolving the imbalances and economic fragilities in the
euro area. However, the political response during the crisis has been complicated by several
factors.
It has been necessary to develop new instruments as a matter of urgency in the midst of the
crisis. Some of those instruments, particularly the financial assistance programmes, are
governed by a decision-making mechanism which is not conducive to the development of
shared responsibility for policies concerning the future of the euro area. This
intergovernmental decision-making process involves endless negotiations, particularly when
it comes to issues with redistributive implications, and highlights the differences between the
positions of the various Member States. Thus, it runs the risk of a conflict between the
legitimate democratic interests of individual countries, without offering sufficient legitimacy at
European level in return.
The raison d'être of this approach is, admittedly, to allow each government to sign up to
shared decisions. However, experience shows that it does not ensure that governments take
ownership of those decisions at national level. What is more, it does not prevent the
polarisation of the debate at European level or the temptation to engage in nationalist
posturing. Finally, it does not facilitate the establishment of a growth strategy based on the
aggregate position of the euro area, the systemic risks associated with national fragilities and
interaction between these various levels.12
To sum up, maintaining this approach would condemn us to a future of low growth and
repeated crises. At a time when global growth may be slowing down, it is our shared
responsibility to avoid the same fate befalling the euro area.
2. Renewing the European project
We must be clear, however: the euro area is an irreversible project, not simply a fixed
exchange rate system. This statement is all the more necessary as the recent negotiations
concerning Greece have let the evil genie of a country exiting the euro area (even
temporarily) out of the bottle. The exit of a member country would inevitably lead economic
actors to wonder who would be next, with all the potential destabilising effects that such
speculation could entail. The genie will not be put back in its bottle once and for all until it is
clear that such a risk will not rear its head again.
We need to use the confidence in the single currency to build institutions that will reinforce
the cohesion of our economic and political union.
To achieve this, we need to recreate the sense of shared responsibility. This will require the
objectives of political and economic integration in the medium term to be better defined, and
work will need to begin immediately to implement them. And as this will not be possible
without the support of European citizens, we must respond to their concerns in the short
term, by reducing unemployment and consolidating the recovery.
a) Our shared goals
Since 2010, the integration of the euro area has progressed under the pressure of the crisis,
with agreements often reached at the last minute. We all have in mind Jean Monnet's remark
that "Europe will be forged in crises, and will be the sum of the solutions adopted for those
crises".13 But some of these solutions, improvised in a hurry, are not always long lasting. For
example, the European Stability Mechanism is an impressive achievement and could
become the foundation of a "euro area Treasury", under the condition that it is brought under
the umbrella of the EU's treaties and under the control of the European Parliament.14
"Integration by crisis" has proved effective, but it no longer inspires the support of the citizens
(if it ever did). So, the euro must be associated with a positive "narrative" and equipped with
the necessary instruments, making sure that they are subject to democratic oversight.
What are Europe's collective goals? What are the public goods that require joint action?
Obviously, the scope of such reflection goes beyond just the economic sphere; it also
encompasses key determinants of power, such as technology, energy and even foreign
policy and security. In federations, public investment in such common goods is centralised.15
Here in the European Union, we are a long way from that. And yet, we face the same
international challenges.
We are asking ourselves these questions so we can identify what we must do better
together, but also to avoid the duplication of competences by identifying areas where political
action is more effective and legitimate at local or national level.16
13
Monnet, J., Mémoires, Fayard, 1976.
14
The "Five Presidents' Report" ("Completing Europe's Economic and Monetary Union", a report prepared by
J.-C. Juncker, in close cooperation with D. Tusk, J. Dijsselbloem, M. Draghi and M. Schulz, 22 June 2015)
recommends integrating the intergovernmental solutions (the Treaty on Stability, Coordination and
Governance in the Economic and Monetary Union, the Euro Plus Pact, the Intergovernmental Agreement on
the Single Resolution Fund and the European Stability Mechanism) into the legal framework of the EU.
15
Cottarelli, C. and Guerguil, M. (eds.), Designing a European Fiscal Union: Lessons from the Experience of
Fiscal Federations, Routledge, 2014.
16
In particular, the economic literature uses as a criterion the comparison between, on the one hand, the
heterogeneity of preferences and situations and, on the other, the externalities linked to different policies. It
also highlights the need for a dynamic approach to take into account the economic and political factors of
convergence and divergence. See, in particular, Alesina, A. and Wacziarg, R., "Is Europe Going Too Far?",
Journal of Monetary Economics, Carnegie-Rochester Conference Volume, 1999, pp. 1-42; Coeuré, B. and
Pisani-Ferry, J., "The governance of the European Union's international relations: how many voices?", in
In the economic sphere, what should our shared goals be? The "Five Presidents' Report"17
seeks to answer this question from the perspective of our monetary union. But the question
is also relevant for the internal market, and thus for the European Union as a whole.
The Five Presidents' Report stresses that we need to reinforce the stability of our economies
by developing solidarity mechanisms, in particular within the monetary union, while ensuring
that governments and economic actors behave responsibly. This is what has been done
within the framework of the banking union, and it's what we must aim to do within the
framework of the capital markets union.18
Likewise, greater risk sharing in the fiscal sphere presupposes sufficient economic
convergence among participating countries. Solidarity cannot turn into a system of
permanent transfers, which is not part of the founding "contract" of monetary union. To put it
another way, this is about establishing a new European social contract, which can be
designed only under John Rawls' "veil of ignorance".19
Such greater risk sharing also presupposes responsible fiscal policies, which are in the
interests of both individual countries and their neighbours. I want to make this clear: we
cannot advocate a Europe of solidarity while believing that the economic policies of each
euro area country are the business of that country's parliament alone. The crisis has fully
exposed that contradiction.
Second, efficiency gains could be achieved if we were to progressively pool certain
resources within the framework of the single market - with such action being justified by
economies of scale and scope, network effects and externalities. This was the logic behind
the establishment of the European Coal and Steel Community in 1951, and today it informs
the Juncker Plan, as well as efforts to develop an energy union and a single digital market.
The joint implementation of a political project and an economic strategy also assumes that
our political union will be strengthened.
To remedy the "executive deficit"20 - in other words, to reduce the difficulties involved in
taking decisions that I mentioned earlier - we should favour sharing decisions that affect the
future of the euro area within common institutions with a European mandate and democratic
oversight at European level. How would the Governing Council of the ECB have dealt with
the crisis if it was just a club of 19 national governors making decisions by consensus?
Following the lead of Jean-Claude Trichet,21 I have spoken out in favour of the creation of a
finance ministry for the euro area under the oversight of the European Parliament. This
ministry could be responsible for preventing economic and fiscal imbalances, managing
Sapir, A. (ed.), Fragmented Power: Europe and the Global Economy, Bruegel, 2007; and Jamet, J.-F., "The
Optimal Assignment of Prerogatives to Different Levels of Government in the EU", Journal of Common Market
Studies, 49, 2011, pp. 563-584.
17
"Completing Europe's Economic and Monetary Union", a report prepared by J.-C. Juncker, in close
cooperation with D. Tusk, J. Dijsselbloem, M. Draghi and M. Schulz, 22 June 2015.
18
Building a Capital Markets Union, Eurosystem contribution to the European Commission's green paper,
21 May 2015.
19
Rawls, J., A Theory of Justice, Harvard University Press, 1971. See also Coeuré, B., "Revisiting the European
social contract", speech given at the European Conference at Harvard - Europe 2.0 Taking the Next Step,
Cambridge, Massachusetts, 2 March 2013.
20
Chopin, T., "Vers un véritable pouvoir exécutif européen: de la gouvernance au gouvernement", Question
d'Europe No 274, Robert Schuman Foundation, 15 April 2013; and Véron, N., "The Political Redefinition of
Europe", opening remarks at the conference organised by the Swedish Financial Markets Committee (FMK)
on "The European Parliament and the Financial Markets", Stockholm, 8 June 2012.
21
"Building Europe, building institutions", speech by Jean-Claude Trichet, President of the ECB, on receiving the
Charlemagne Prize 2011 in Aachen on 2 June 2011.
crises in the euro area and managing the budgetary capacity envisaged by the Five
Presidents' Report, as well as representing euro area governments in international economic
and financial institutions.
b) What to do in the short term
None of what I have mentioned will be possible without the support of European citizens.
What do they expect? That unemployment will fall and growth will strengthen. There is a
temptation to leave it up to the low oil price and the ECB's accommodative monetary policy.
Monetary policy can support growth but it cannot create it in a lasting way. And the
effectiveness and legitimacy of euro area governance will not be increased by placing
excessive demands on the central bank - quite the opposite.
I think it is vital in the short term that the banking union be finalised, with, in particular, an
early agreement on a common backstop for the Single Resolution Fund and the progressive
implementation of a European deposit insurance scheme, accompanied by reforms
uncoupling once and for all the solvency of banks from that of governments. Second, if the
euro area is one economy and not the sum of 19, we must have a common growth strategy
based on the identification of our structural weaknesses and a collective discussion
regarding the reforms to be implemented. The key words must be "productivity" and
"employment rate", which are positive-sum games - not "competitiveness", which is a
zerosum game. Participating countries will not support euro area growth by competing for their
neighbours' market shares.
Conclusion
There is nothing inevitable about the status quo, but, to go beyond it, we need to rediscover
the spirit of Robert Schuman. In 1950, this French Foreign Minister had the political courage
to propose to Germany that the two countries pool their economic resources22 and share
sovereignty within a common institution.23 This gave birth to European integration.
Let's not forget that shared ambition is a powerful driving force. Herbert Blankenhorn, then
Adenauer's diplomatic advisor, recorded in his diary the Chancellor's words of 24 May 1950
and the optimism inspired in him by Schuman's plan: "Wenn Furcht beseitigt werde, werde
Europa wie ein genesender Kranker seine Kräfte wiederfinden"24 ["Once fear has been
overcome, Europe, like a convalescing patient, will find its strength again"].
Thank you for your attention.