Jörg Asmussen: Agenda 2013 - the next steps in completing EMU
Speech by Mr Jörg Asmussen, Member of the Executive Board of the European Central
Bank, at the "Internationaler Club Frankfurter Wirtschaftsjournalisten", Frankfurt am Main,
19 December 2012.
* * *
1. Introduction
Ladies and gentlemen,
Thank you very much for inviting me to speak to you this evening. It is now almost one year
since I started my term in the ECB Executive Board, and it is interesting to reflect on how
Europe has changed in that time. When I joined the ECB in January, the situation looked
bleak. The first 3 year LTRO had temporarily calmed the markets, but many informed
commentators were predicting a very difficult year ahead. Putting probabilities on a euro
break-up had become a cottage industry.
Today, we have grounds to be cautiously optimistic. The fear of catastrophic tail risks has
lessened. This is in part due to actions taken by the ECB to ensure monetary policy
transmission, notably through our OMT programme. But it is also due to very important
changes that have taken place in euro area governance. Of these, the most significant is the
recognition by the euro area Member States that EMU is an incomplete project - and that it
urgently needs completing.
For this reason, the topic of my address will be that process of achieving a genuine EMU,
focusing in particular the conclusions of the European Council last week. I will say upfront
that this outcome is not the definitive vision for EMU. It necessarily balances the views of
European policy makers, reflecting what is realistic in the current political circumstances,
while - I hope - remaining sufficiently ambitious to give citizens and investors a sense of
direction of where the euro area is heading.
Accordingly, we need to think about the process of completing EMU in two phases: those
elements that can be implemented quickly and can make a real difference to the euro area
already in 2013; and those elements where more progress needs to be made in the
mediumterm as the integration process evolves. Let me begin by focusing on the first phase: the key
elements for the year ahead.
2. Key elements for 2013
a) Completing financial market union
Perhaps the most important element of agreed by the European Council is the commitment
to construct a real financial market union in the euro area. This will be critical in 2013 for
three reasons.
First, a stable and healthy banking system is necessary to restore normal monetary policy
transmission across the euro area, and hence to ensure that the ECB's low rates are duly
passed on to all parts of the euro area.
Second, restoring confidence in the financial sector - of which the banking system is the
bedrock - is the only way to re-integrate the single financial market and therefore disentangle
banks from their sovereigns.
Third, putting in place a less risky banking system and fixing the credit channel are key
contributions to restarting growth across the euro area during 2013.
Towards a Single Resolution Mechanism
The agreement on a Single Supervisory Mechanism (SSM) by the EU Finance Ministers is
an important first step towards a real financial market union. But it is only one component. A
financial market union has to involve a Single Supervisory Mechanism and a Single
Resolution Mechanism (SRM). This is the only way to ensure that taxpayers do not end up
paying for the mistakes of the private sector. Let me explain why.
Banks that are "too big" or "too interconnected" to fail at the national level - making bailout
the preferred strategy - would not benefit from this status at the European level. The SRM
would have the legal and financial capacity, as well as independence, to ensure that viable
banks survive and non-viable banks are closed down.
Moreover, banks that are "too complex" to resolve via cross-border cooperation - making
early action impossible - could be dealt with more effectively at the European level. The
SRM would create an authority that could concentrate decisions on resolution and act
preemptively and quickly, helping to preserve the value of the banks and save money for
taxpayers.
Principles for European public support
However, a strong resolution mechanism cannot remove risks for taxpayers entirely.
Certainly, any costs incurred from resolution should first and foremost be covered by the
private sector, through establishing a European Resolution Fund raised by levies on the
banking sector. But a real financial market union must also contain a public sector dimension
at the European level. In this context, the European Council called for the operational
framework for direct bank recapitalisation by the ESM to be ready by the first semester of
2013.
I am aware that the prospect of ESM direct bank recapitalisation raises serious concerns:
that European taxpayers will end up paying for the bad assets accumulated over the past
decade; that mutualisation will become standard practice for dealing with banking sector
problems. But let me reassure you that these concerns can be contained with what I would
see as the three key principles for European support.
First, European support has to be accompanied by European control, meaning public funds
can only be used after the SSM has effectively assumed its duties and on the basis of strong
conditionality.
Second, European support should only be granted to banks that are systemically relevant, or
pose a serious threat to European financial stability, and therefore affect the common good.
Third, European support must come at the end of a sequential process, involving the
following steps:
•
one, the beneficiary banks must undergo a thorough and independent economic
evaluation of their assets to ascertain their real capital needs and reveal any legacy
problems;
•
two, those banks must be assessed to have a viable business model and so be
deserving of additional capital, otherwise they should wound down;
• three, if the banks are to be kept going, private sector sources should be exhausted
first - meaning bailing-in of shareholders and bondholders, and if needed, use of the
bank-funded resolution financing;
•
four, if there are still capital shortfalls, the financial resources of the beneficiary
Member States should be drawn on;
•
only in the very last step, would European public funds be used.
This pecking order underscores that, the stronger the European resolution framework, the
lower the eventual costs for European taxpayers. The more the financial sector can be
bailed- in, the less it has to be bailed- out. We see in the US how this can work: the FDIC
closed down more than 400 banks during the crisis, without any cost for taxpayers. This is
the standard we should be aiming for in Europe - and a real financial market union is the
only way to achieve it.
Let me make a final point regarding the institutional set-up of the SRM and Resolution Fund,
which is my own personal view: the ESM would be well-suited to perform the tasks of the
SRM and to house the European Resolution Fund raised from the banking sector.
b. Building economic union
The second key outcome of the European Council is the aim to strengthen economic union -
particularly by ensuring that national economies can remain competitive and hence prosper
within a single currency area. The importance of this issue for 2013 cannot be overstated, as
it is critical to ignite growth and lower unemployment. We can see before our eyes a series of
cases where quick implementation of targeted reforms could have a strong impact, even in
the near-term.
For instance, despite the recession in Italy, unit labour costs have adjusted by only 0.1%
relative to the euro area average since 2008. This is because many sectors of the economy
are sheltered and wages do not respond to weak productivity. It needs product market
reforms to increase competition and reinvigorate its external competitiveness.
In Spain, employment is struggling to rebound, and the burden on unemployment falling
disproportionately on the young, because its two-tier labour market protects insiders. It needs
labour market reforms to bring in outsiders and improve incentives to hire.
The Conclusions propose to kick-start this much-needed process of reform through three
avenues. First, a renewed effort to complete the Single Market, in particular by opening up
services and increasing labour mobility. Second, a thorough assessment, carried out in all
euro areas countries, of the compatibility of their labour and product markets with
membership of EMU. And third, for the issues identified in this assessment to be addressed
through the new concept of "Reform Contracts". Let me elaborate some more on this last
point.
The idea behind the "Reform Contracts" is that countries would commit to specific structural
reforms that have a direct positive impact on competitiveness, with those commitments
formalised in a legally binding contract. The contract would be multi-annual and, to foster
national ownership, initiated by the national government and approved by the national
parliament. If the terms of the contract were met, financial support would be provided,
targeted at the transitional costs arising from structural reforms - for instance, re-training
programmes for displaced workers.
What are the benefits of this approach compared to the status quo? In my view there are
three, although they depend very much on how the concept is eventually implemented.
First, the contracts could be entered into as part of a concerted national reform effort, rather
than being seen as an imposition from "Brussels" in the context of the EU procedures like the
European Semester.
Second, reform commitments could potentially be more precise, measurable and binding in
the contracts than under those existing procedures. However, this effect would quickly be
lost if it simply becomes another bureaucratic procedure.
Third, and perhaps most importantly, because the contracts are multi-annual they could allow
for deeper reforms than are possible under existing procedures. There have been a series of
recent studies that suggest that competitiveness is not only about flexibility, but also strongly
connected to governance. We see clear correlations between countries' economic
performance and their rankings in governance indices published by, among others, the World
Economic Forum and Transparency International. The contracts provide an opportunity, if
used properly, to "go deep" and address these more fundamental barriers to
competitiveness.
Building a stronger economic union along these lines is necessary to correct what might be
called an "original sin" of EMU: the fact that the convergence criteria did not include any
structural benchmarks for joining the euro, and hence structural policies remained mainly
within the national remit.
3. Areas for further progress in the future
What about those areas that were not outcomes of the European Council and where there is
room for further progress in the future?
The most important is greater sharing of sovereignty. The importance of credible governance
has been starkly demonstrated during the crisis. Countries without credible policies have
been forced by markets to consolidate more rapidly than others in the downturn. This is
because markets have not trusted that they can run sufficient surpluses in good times, or
achieve sufficient growth, to lower debt levels and ensure long-term sustainability.
Paradoxically, the lack of strong external constraints on fiscal and economic policies has led
to countries losing substantive sovereignty in these areas.
By the same token, countries now need to share more sovereignty in order to regain their
sovereignty. By sharing decision-making with the European level, they can restore their
policy credibility with investors, while at the same time having a voice over where they are
heading. This will mean going beyond the Maastricht logic of national responsibility for fiscal
and structural policies, and committing to governance arrangements that are actually
enforceable - for instance, allowing for intervention rights by the center to prevent unsound
national budgets.
Sharing sovereignty implies a number of other changes to euro area governance. First, there
have to be strong institutions in order to exercise that sovereignty effectively. This will require
a stronger Eurogroup. Second, those European institutions have to be properly
democratically legitimated. This requires changes in the way the citizens participate in the
European political process, in particular via the European Parliament.
Let me stress: while I would have liked the outcome of the European Council to be more
ambitious, these ideas are not intended as criticism of it. They are orientations to advance
further which will need to be properly fleshed out in the years ahead as the integration
process evolves. This will require a Treaty change in the medium-term in order to complete
EMU in a comprehensive way.
4. Conclusion
One year ago, the euro area was facing an uncertain future. But those painted a dark picture
at that time have been proven wrong. One year later, Europe has proven its ability to act and
we have begun to set the euro area on a more convincing path.
It is now critical that, over the next year, we continue down this path and provide EMU with
institutions it needs to advance. Putting in place a genuine financial union and a stronger
economic union must be our key priorities for 2013. It is essential that the appearance of
calm on financial markets does not distract from the urgent need to address the euro area's
fundamental challenges.
Moreover, we should also not row back on what has already been achieved. Implementing
the Fiscal Compact and adopting the "Two Pack" of legislation in 2013 are essential to
strengthen the fiscal framework. We should not undermine this by re-opening discussions on
what constitutes "good" or "bad" deficits by arguing for exemptions for public investment. All
deficits have to be financed on financial markets and increase public debt stocks - and this is
the opposite of what we need next year.
However, this focus on 2013 does not mean we should lose sight of the big picture. It is
instructive to notice how little markets are reacting to the "fiscal cliff" debate in the US, while
they are jolted by the prospect of earlier than planned elections in Italy.
Our long-term goal is a situation where the essential functioning of the euro area is
unaffected by events in individual countries, because sovereignty is shared and exercised in
strong common institutions - and those institutions have a longer time horizon than politics.
This is what Jean Monnet understood when he said:
"Rien n'est possible sans les hommes, rien n'est durable sans les institutions".
"Nothing is possible without men, but nothing is lasting without institutions".
These words have never been more true than today.
Thank you for your attention.