Benoît Coeuré: Time for a new Lamfalussy moment
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank,
at the Professor Lamfalussy Commemorative Conference, Budapest, 1 February 2016.
* * *
I would like to thank Lucas Guttenberg for his assistance in preparing this speech. All views expressed herein
remain mine.
Summary
Recalling the crucial contribution of Alexandre Lamfalussy to European integration, Benoît
Coeuré calls for a new method to accelerate this process at a commemorative conference in
Budapest today. The fact that Europe is facing so many challenges should not discourage
Member States from integrating further. On the contrary, says Benoît Coeuré, countries sharing
the euro should show they are able to go forward in a unified manner. A successful euro area
is crucial for a successful European Union. A strong political commitment to complete the
Economic and Monetary Union (EMU) is also needed to strengthen the recovery and spur
investment. It will show the public, business and markets that we are serious about make the
euro a success. In the end, there will be no sustainable economic convergence without a
political convergence, which implies a common understanding of what economic and fiscal
policies look like in a monetary union. This is a root cause of why the spirit of the common rules
is not sufficiently implemented. The moment has come to structure the process of integration
in a new manner. This means putting the debate on European integration back where it
belongs - in the political arena.
Dear Governor Matolcsy,
Ladies and Gentlemen,
Almost to the day 15 years ago, on 15 February 2001, Alexandre Lamfalussy and his
Committee of Wise Men submitted their Final Report on the Regulation of European Securities
Markets to the Commission.1 To deepen integration in the Union's financial markets, they
proposed to distinguish between the political choices and the more technical measures in the
area of financial legislation; the former would be made by the legislators themselves, while the
latter would be left to technical bodies. The intention was to significantly streamline the
legislative process in order to ensure that the Union's legal framework for financial services
was keeping up with the rapidly changing realities on the ground. The offspring of the
Lamfalussy Report is today's European System of Financial Supervision, comprising the EBA,
ESMA, EIOPA and ESRB.
Lamfalussy and his colleagues had realised that there are moments when one has to shift
gears and change the method in order to progress. It was the right time, an auspicious moment
- or kairos as the ancient Greeks called it - to make a change.
I will argue that today that we have reached another such kairos, that we are at a point where
we should consider changing our method again. Economic and Monetary Union (EMU) needs
a Lamfalussy moment, a moment when we realise that our current approach to moving
European integration forwards is no longer good enough, and that we should seek new
solutions.
In 2000, aiming for new solutions meant developing new ways of tackling technical standards.
This time, our goal should be to design a political strategy to broaden the scope of integration
so as to make EMU truly sustainable; to achieve this, we will need new political convergence
to accompany new economic convergence.
To explain my thinking, let me first turn to the economic recovery and how to consolidate it;
and second, how shifting gears with regard to completing Economic and Monetary Union could
help to improve the situation in which we currently find ourselves.
A challenging time for Europe
At this conference a year ago, I argued that Lamfalussy had been right to claim early on that
Economic and Monetary Union implied interdependencies which needed to be governed
robustly. I also acknowledged that we had certainly not reached that point.2 Indeed, 2015
provided us with numerous examples of the deficiencies of our governance framework.
Negotiations with the Greek government went on for months, exposing the shortcomings of
our institutional architecture in addressing collectively what was a collective problem - securing
Greece's future in the euro. In parallel, the economic and fiscal policies of individual Member
States did not do enough to complement the impulse coming from our very accommodative
monetary policy stance, leaving euro area growth until recently far below its potential, and far
below what would be needed to secure the future of our unemployed young people.
But 2015 was also the year when our countries' focus shifted away from the unresolved
economic issues and towards the global challenges that Europe is facing. It is not for me as a
central banker to comment on matters such as migration policies. Nevertheless, allow me two
remarks:
Many of the challenges with which the Union is confronted - be they refugees, be they
terrorism, climate change, or the state of the economy - point to the fact that we need to
strengthen our capacity to work together in a spirit of joint responsibility. What frightens the
public and markets alike is that Europe seems too often unable to act in a unified manner.
Hence, I am convinced that if we can advance in one area and show that we can act jointly,
this will help us to work together in other policy areas as well.
And we should be under no illusions: if downside risks to the recovery were to materialise, this
would not make it easier to respond to the refugee crisis or to counter terrorism. Therefore, the
fact that Europe is facing pressing challenges in other policy areas should not discourage us
from progressing as regards Economic and Monetary Union. On the contrary, an economically
successful euro area is crucial for a successful European Union.
Ingredients for a structural recovery
At the ECB, we have always made it clear that we are ready and able to play our part in the
recovery. This means ensuring stable prices - which means inflation being below, but close
to, 2% in the medium term. Price stability acts as a foundation on which the economy can
grow. This was the rationale behind the ECB embarking on large-scale public sector purchases
one year ago. And this was also the rationale for our re-calibration of the purchase programmes
in December.
The euro area numbers clearly show that our monetary policy is having the intended effect.3 It
represents a major contribution to the ongoing cyclical recovery. And the Governing Council
will review and possibly reconsider its stance when it meets in March. But for the recovery to
become structural - and thus to increase growth potential and reduce structural unemployment
- monetary policy does not suffice.
I have recently explained elsewhere that rebalancing in the euro area has come a long way
since the start of the crisis, but is not finished yet.4 The challenge now is to further consolidate
the recovery and the rebalancing of the economy.
In my view, three ingredients could make a difference here:
First, more flexible economies to ensure that adjustments can take place via market
mechanisms.5 This means making the most of a low-interest rate environment to embark on
structural reforms. These will not only increase growth tomorrow by boosting productivity and
employment, but also will send a signal of confidence and unleash investment opportunities
today.6
Which leads me to the second ingredient: higher levels of investment. Since the beginning of
the crisis, investment has shrunk markedly. Of course, we should be careful not to assume
that investment levels right before the crisis were desirable, as they partly reflected exuberant
behaviour. But despite the current low interest rate environment, we are still well below the
average numbers for the period 1995-2005 for both public investment and private investment.7
This shows that an essential ingredient for sustaining the recovery is still missing.
And third, which brings me back to my call for a Lamfalussy moment, a strong political
commitment to complete Economic and Monetary Union so as to give the public, businesses
and markets a strong signal that we are serious about making the euro a lasting success.
Given that today's conference is in honour of Alexandre Lamfalussy, I'll focus the rest of my
comments on that last point - completing EMU.
The Five Presidents' Report, which was published last summer, provides a very useful
roadmap for moving ahead. However, discussions in recent months have shown that not
everyone agrees on the need to complete EMU.
Nevertheless, in my view we might be able to agree, for a start, on three principles that could
guide future work towards a complete Economic and Monetary Union and that strongly
reinforce the proposals made in the report. These principles are as follows:
Risk sharing and risk reduction - a parallel approach
First, risk sharing and risk reduction should go hand in hand - both as regards strengthening
the banking union and as regards economic and fiscal policies.
Think of it as being like building a house. Of course you will want to take all the necessary
precautions to prevent fires, and you will want your neighbours to do the same. But even with
the best precautions, you will probably still want to buy fire insurance, and rightly so. And if you
buy it together with all your neighbours, it will be much cheaper.
The same logic applies to EMU. Risk reduction on its own will not be sufficient; we will need to
better share the remaining risk as well. The two are complementary.
For banking union, this means reducing risks in banks in parallel to establishing a common
deposit insurance scheme and a robust fiscal backstop. This is what the Commission has
proposed, and this is why we support their approach.
When we speak about fiscal and economic policies, combining risk sharing and risk reduction
means that more pooling of fiscal resources - which I believe is ultimately necessary to provide
better insurance against shocks - will have to be accompanied: (i) by a new convergence
process which ensures that all economies have a similar resilience to shocks; and (ii) by
initiatives to restore the credibility of our fiscal rules. These two elements are all about
preventing risk sharing from becoming a one-way street, in other words preventing risk sharing
from turning into risk shedding.
Joint decision-making on matters of common concern
The second principle we might be able to agree on is that there are policy domains where
coordination via rules has run its course and is no longer a viable substitute for joint
decisionmaking within common institutions. The argument here has two parts:
On the one hand, there should be no doubt that the rules that are in place have to be respected.
This is not some kind of theological dogma. This is because it is economically and politically
the right thing to do - not only to avoid the macroeconomic instability stemming from excessive
imbalances, but also to re-establish mutual trust, which is the precondition for progress. Think
about the high public debt levels of many Member States. If we want to be able to tackle the
next crisis and have sufficient fiscal room for manoeuvre, strictly applying the rules of the
Stability and Growth Pact today is both logical and imperative.
But on the other hand we have seen the political limits of the rules-based framework. Every
time the rules are set to bite, national interests prevail over those of the euro area. This is built
into the framework: as long as economic and fiscal policies are in the end a matter of national
competence and as long as commonly agreed rules are perceived as an intrusion into policies
that are seen as genuinely national, the interests of the euro area as a whole will probably not
be strong enough to carry the day unless a country is forced to enter a financial assistance
programme.
Therefore, we will, in the end, have to accept certain economic and fiscal policies in the euro
area as truly shared competences, as the internal market already is; others, which are not
essential for the smooth functioning of EMU, should remain solely a national competence.
Hence, such a step should certainly not mean centralisation at European level for each and
every policy. But it should mean that in those policy areas that are crucial for the functioning
of EMU common legislation and policies will be needed where appropriate and warranted to
ensure the primacy of the common interests of the euro area.
Such legislation and policies will in turn necessitate the further development of our institutional
architecture. One element here will be to strengthen the euro area executive with a euro area
treasury, be it within the Commission or as a separate body. Another element will be to build
up a genuine legislative capacity at euro area level and to make institutions acting in the euro
area's interest, such as the European Stability Mechanism, accountable to it.
The Lamfalussy moment - making the debate on EMU political
And then there is a third principle on which I hope agreement can be found, namely that we
will see sustainable economic convergence only if accompanied by political convergence. Why
is that so? It is because discussions on economic governance in the euro area in recent years
have revealed that we still have no common understanding in Europe of what economic and
fiscal policies should look like in a monetary union.
A common understanding of the aim of monetary policy did develop when the monetary union
was being set up; today, we have a clear and broadly shared consensus that the ECB should
first and foremost pursue price stability. We have seen a similar approach and attitude
increasingly being taken to financial regulation.
But this is not necessarily the case for those policies which, as I just mentioned, remain largely
in the national domain but subject to European coordination. This is no coincidence. Monetary
policy and banking supervision are inherently technical and seemingly distant from the lives of
ordinary people, whereas labour market institutions, product market regulations or the quality
of a country's administration are not at all like this, as they affect the everyday lives of
individuals.
The diversity of opinion on economic policy is a sign of a healthy, pluralist democracy and
certainly not a problem. At national level, institutions and procedures exist which permit
divergent views to be channelled into political decisions that leave little room for ambiguity.
There are, as yet, no procedures or sufficient incentives to facilitate a consensus on the design
of economic policies in a functioning economic and monetary union. This is a root cause of
why the spirit of the common rules is not sufficiently respected - as there is no consensus on
what this spirit ought to be.
Our methods of advancing European integration have so far not been sufficient to foster such
a consensus - hence we need a Lamfalussy moment and a shifting of gears.
This would mean putting the debate on European integration back where it belongs - in the
political arena.
We are at a point where integration cannot and should not continue as a technical and
technocratic exercise. It is now time for political leaders to take up the baton, because only
they will be able to convince their electorates of the need for further deepening.
Therefore, as I said earlier, new economic convergence will need to be complemented by
political convergence. Such a process would, in an inclusive and democratic way, ensure that,
in parallel to converging economically, we would develop a common understanding of
economic policies in the euro area that would underpin our common rules.8
Such a political process might not lead to the best outcome from our point of view as
economists. But this would be a price worth paying if, in return, the outcome is a consensus
that is fully democratically legitimised.
Conclusion
Let me conclude by saying that it is not my role to prescribe how such a process could be
structured. But as long as we continue to speak the language of the insiders and remain vague,
we will not engage citizens in a debate on the right economic policies for the euro area. I can
perfectly understand why political leaders do not want to face their electorates and defend a
euro area fiscal capacity when even we, as experts, cannot really agree on its definition.
When presenting his preliminary report, Lamfalussy argued in 2000 that the Union had a clear
choice "either to dawdle aimlessly along in our slowcoach, in the slow lane - with ... the world
passing us by, or to change and capture the benefits".9 I could not have found a more fitting
description of the situation we find ourselves in now.
Thank you for your attention.
9 November 2000 (http://ec.europa.eu/internal_market/securities/docs/lamfalussy/wisemen/lamfalussy-
summary_en.pdf)