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Stability and prosperity in Europe
Speech at the Munich European Conference: Security and Prosperity in Europe,
Giesecke+Devrient

15.02.2024 I Munich I Joachim Nagel

Check against delivery.

1 Words of welcome
2 Europe's prosperity
2.1 EU and euro have contributed to prosperity in Europe
2.2 Dismantle barriers in the services sector
2.3 Remove barriers in the financial market: strengthen banking and capital markets union

2.4 Press ahead with green structural change

2.5 Press ahead with digital structural change
2.6 Safeguard sound public finances
3 Security in an evolving world

4 Conclusion

1 Words of welcome

Ladies and gentlemen,

It is a pleasure and a privilege for me to speak today on the eve of the Munich Security Conference,
one of the most important global events that takes place in this country every year, here at the
eighth Munich European Conference, which reflects on and debates avenues that can lead to greater
security and prosperity in Europe.

lam here as a central banker. That is why I have slightly modified the conference topic of "Security
and Prosperity in Europe" with some care to "Stability and Prosperity in Europe" for my keynote
speech. Geopolitical security is not a central banker's key topic. I would therefore ask you to interpret
the few comments I make on this subject at the end of my speech as the personal views of a politi-
cally minded citizen. Stability, by contrast, is the core competence and mandate of the Eurosystem,
and thus also of the Bundesbank: stability of prices, of credit institutions, of the financial system and
of payments. That is our contribution to safeguarding prosperity and economic security in Europe.

2 Europe's prosperity

2.1 EU (European Union) and euro have contributed to prosperity in Europe

Prosperity in Europe gained a notable boost in 1993, when the European single market was estab-
lished by twelve countries at that time. Fast forward 31 years to the present day, and the single
market is home to 31 European countries, 450 million people and around 24 million businesses.

In terms of goods, now everyone can be offered the same product. National regulatory rules do not
require country-specific models. And products do not need to undergo approval procedures in every
single country. That lessens frictions and allows larger quantities of goods to be manufactured at
lower unit costs and lower prices. At the same time, the single market's common rules and standards
have helped create a level playing field and thus spurred competition, economic growth and
prosperity.

Our single currency - the euro - has been amplifying the single market's benefits for 25 years now. In
he euro area, exchange rate risk and currency conversion charges are a thing of the past. And prices
are easier to compare. Another aspect that is conducive to trade. And which strengthens competi-
ion, thereby adding to prosperity. The Bundesbank, under its then-President Karl Otto Pohl, played
an instrumental role in shaping the Maastricht Treaty. Pohl was convinced that - and I quote -"...

he consolidation and ongoing development of the European Monetary System have a key role to
play in securing political and economic integration in Europe."[1]

The single market alone has boosted economic output in the EU (European Union) by around 3 to
5%2%, studies have found.[2] This stands in sharp contrast to the impact of Brexit. The United
Kingdom's withdrawal from the single market may have reduced the country's

GDP (Gross Domestic Product) by 6% so far, a recent study suggests.[3] For economic reasons alone,
there is everything to be said for strengthening the single market further as a source of prosperity.
There is certainly a need for this. Because the single market is still far from perfect.

2.2 Dismantle barriers in the services sector

You see, cross-border trade in services is far smaller than it is for goods.[4] To a degree that is natural,
as many services are more difficult to trade across long distances than goods. It is easy to order a
book in Paris while sitting in Munich. Visiting a hairdresser in Paris is a trickier undertaking.

That said, a large and growing number of services are being provided at distance thanks to digitalisa-
tion. There once was a time when your local agent was the first port of call in insurance or personal
finance matters, say. But these days, much can be done over the phone or in fully automated pro-
cesses through the insurer's or bank's own self-service portals. Overall, though, there are home-made
barriers restricting the flow of services. Many national regulations inhibit the provision of cross-
border services, particularly legal services, but also in the area of architecture and engineering.[5]
They're a drag on efficiency.

Many a national regulation may well exist for a good reason - differences in the legal system or in
national preferences, say. But for many barriers, that kind of justification seems fairly questionable.
That is why Member States need to dismantle barriers that are uncalled for, particularly in the ser-
vices sector. They need to further deepen the single market by embracing reform and simplifying
public administration as a way of improving competitiveness levels.

2.3 Remove barriers in the financial market: strengthen banking and capital markets union

The banking and capital markets union is another area where we are still a long way off from achiev-
ing complete integration. One major barrier is the variety of insolvency regimes across

EU (European Union) Member States.[6] I am pleased that the Commission's legislative proposal on
the capital markets union is now tackling numerous barriers. What matters is that cross-border
investment is promoted as a result.

An integrated capital market is important, and particularly so in the euro area. It will support the
single monetary policy. Because it will play a part in ensuring that monetary policy impulses have
equal effect throughout the euro area. And in the event of an economic shock in one Member State,
downstream costs would be spread across the currency area. In this respect, greater private risk
sharing can be the key to boosting the stability of the financial system.

Another benefit of an integrated capital market is that it would ease the mobilisation of funds for
private investment and thus strengthen the forces of growth. Securitisation may also have an impor-
tant role to play in this context. You see, these financial instruments bridge the gap between bank
finance and the capital market. They need to be regulated in a risk-appropriate manner - that goes
without saying. What makes the ability to mobilise private capital more easily even more important is
the fact that huge amounts of funding will need to be raised in the years ahead. For large and press-
ing challenges lie ahead of us - first and foremost green structural change towards climate neutrality
and digital structural change.

2.4 Press ahead with green structural change

The EU (European Union) has already taken action to address green structural change in the shape of
the "European Climate Law", which will see Europe achieve climate neutrality by 2050. Along with a
reduction in greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. "Fit for
55" is the name given to the EU (European Union)'s ambitions on this front. The EU (European Union)
emissions trading system (EU (European Union) ETS (emissions trading system)) is the cornerstone of
the EU (European Union)'s policy to combat climate change. The EU (European Union)

ETS (emissions trading system) offers the decisive benefit of reducing emissions cost-efficiently - that
is, at the lowest possible cost to the economy as a whole. Efficient policy measures of this kind are
crucial in the face of the Herculean task that green structural change alone represents. At the same
time, the EU (European Union) is looking to take the lead in the development and use of sustainable
technologies in key areas, such as batteries and solar power systems.

The Green Deal Industrial Plan will use subsidies and financial support to stake out an industrial policy
path leading to that goal. In doing so, we need to conduct a realistic stocktake of the potential and
constraints of industrial policy. And a subsidy race should be avoided at all costs, including in view of
the US (United States) Inflation Reduction Act. Distorting competition would create capacities in the
wrong places or might leave taxpayers footing a huge bill.

2.5 Press ahead with digital structural change

Green structural change towards climate neutrality isn't the only challenge that lies ahead: digital
structural change is another big ask. Recent advances in artificial intelligence suggest that its impact
on labour and financial markets will be momentous, particularly if generative Al is able to create new
text, video or audio content. This surge in digitalisation is likely to give productivity an additional
boost, of the kind we saw in the past when innovative digital developments emerged. And it is pre-
cisely higher productivity that leads to higher economic growth. That point was made recently by
Agustin Carstens, General Manager of the Bank for International Settlements.[7]

The public sector can play a role in driving digital structural change - and should do so, too, given

he expected boost in productivity. Looking at Germany, it is a matter of pressing ahead with the
expansion of high-performance telecommunications networks, digital upskilling - in the education
system and with labour market policy - and of the public administration making up the ground it has
ost in terms of digital readiness. On that last point I've brought some figures with me: the Online
Access Act stated that all key administrative services must have gone digital by 2022. As it turns out,
no more than 33 out of 575 public services had gone digital.[8] So there is still a wealth of potential
0 cut red tape for all and to speed up administrative processes. Things need to move much more
quickly here. At the European level, digital structural change is being supported by Digital Decade[9]

-a policy programme that sets binding digitalisation targets and establishes legal certainty by
mapping out regulatory requirements.

However, the more we go digital, the greater our exposure to cyber risk. A study published last
month found that 44% of firms surveyed in Germany saw cyber risk as the greatest risk their busi-
ness faced.[10] Worldwide, that figure has risen to 36% on average - a long way ahead of the
second greatest risk: business disruptions due to supply chain failures and the like. Cybersecurity,
then, is a topic that all stakeholders need to regard as an important task. Financial supervisors, for
example, are doing just that. That's an area where we at the Bundesbank work hand in hand with
BaFin (Bundesanstalt fur Finanzdienstleistungsaufsicht). This year, financial supervision has prioritised
the risks posed by hackers as well as the outsourcing of IT (Informationstechnologie) services. That
more needs to be invested in one's own defences is a view that is becoming increasingly common-
place at the European level, too - and that arguably goes for both IT (Informationstechnologie) secu-
rity and the security and integrity of borders.

2.6 Safeguard sound public finances

Rising to the challenge of green and digital structural change is a huge ask for everyone, not least for
public finances. This is because, on the one hand, there are good reasons to spend more public
money on certain forward-looking tasks. On the other hand, government needs to keep its financial
affairs in good order. If a crisis strikes, a government will only ever have agency if its finances are
sound. This enabled Germany to provide substantial support to households and firms during the
COVID (Coronavirus Disease)-19 pandemic. And sound public finances make life easier for monetary
policy by allowing it to focus its full attention on maintaining price stability. That's how sound public
finances make monetary union more stable.

If we take a look at public finances in the euro area, we see a very mixed picture. Even the average
debt ratio of euro area countries is significantly higher than it was at the launch of monetary union.
And it is precisely the very highly indebted countries - countries whose general government debt is
higher than their annual GDP (Gross Domestic Product) - that nonetheless have persistently high
fiscal deficits. In December, an agreement was reached to reform the European fiscal rules. Now it is
a matter of leveraging the new rules to actually bring down the high debt ratios. The safeguards
introduced by the Federal Government can help make sure that happens. Shrinking debt ratios would
boost investor confidence - just like a credible fiscal strategy. Monetary policy has a strong interest in
this. And it would promote economic growth and prosperity in Europe.

3 Security in an evolving world

The harsher the world around us gets, the more important it becomes to strengthen Europe econom-
ically. Things are getting harsher right now. The world is becoming more muddled. And more con-
flict-ridden. The Peace Research Institute Oslo reports that more than 50 state-based conflicts have
been recorded. That is a particularly high level in postwar history.[11] There was talk in the post-Cold
War early 1990s that "the end of history" had been reached.[12] Many were convinced that democ-
racy, liberalism and the market economy would prevail. Things didn't quite turn out that way,
though, and the future world order remains unclear. It does, however, appear to be multipolar.

In that kind of world, stability has to be safeguarded in a variety of ways: by complying with interna-
tional law, through stable partnerships and with robust international organisations. The World Trade
Organization (WTO (Welthandelsorganisation)) is one such organisation I could mention. It stands for
a rules-based, open trading system. In a multipolar world, this system could unlock considerable effi-
ciency gains. But to achieve that, the WTO (Welthandelsorganisation)'s system of rules needs to be
overhauled at long last.[13] EU (European Union) enlargement is another topic worth mentioning
here. The European Council called enlargement a "strategic priority" in light of Russia's war of
aggression against Ukraine. The focus is currently on the Western Balkans. The European Council has
committed to gradually integrating these countries into the single market ahead of

EU (European Union) accession. In addition, regional free trade agreements are gaining in importance
again. These would likewise bolster the resilience of the European economy. And last but not least,
given the many elections that will be taking place this year, we can only hope that they elect govern-
ments that uphold the values of democracy, comply with the law and international rules, and see
themselves as part of a community of nations.

4 Conclusion

Ladies and gentlemen,

Standing up for Europe and bringing out its best are worthy endeavours.

Europe has always been a peace project. And has achieved that mission with great success.

The European single market and the euro were instrumental in boosting prosperity - and still are.
Weakening Europe would destroy prosperity.

We must not let it come to that!

Let us instead help mould a stable Europe.

A Europe that stands for democracy, solidarity and the common good. A Europe that forges peace. A
Europe that does not divide, but unites. A modern Europe that inspires people. A Europe that looks
ahead, that rises to challenges. A Europe that gives people firm foundations and guidance. A strong
European Union.

In all that it does, the Bundesbank will advocate for a stable Europe - as a strong partner in the
Eurosystem.

Footnotes:

1. Pohl, Karl Otto (1985), speech in Paris, Quotes by Karl Otto Pohl
[https://www.bundesbank.de/resource/blob/608060/06cde2 9bffa5ad90ac478d3ed584d903/mL/zitate-
von-karl-otto-poehl-data.pdf]

2. Felbermayr, G., J. Groschl and I. Heiland (2022), Complex Europe: Quantifying the cost of disinte-
gration, Journal of International Economics, Vol. 138, September 2022
[https://www.sciencedirect.com/journal/journal-of-international-economics/vol/138/suppl/C] and
Mayer, T., V. Vicard and S. Zignago (2019), The cost of non-Europe, revisited
[https://academic. oup.com/economicpolicy/article/34/98/145/548606 1], Economic Policy, Vol. 34,
April 2019. A study conducted on behalf of the European Commission estimates that
EU (European Union) GDP (Gross Domestic Product) is as much as 8 to 9% higher thanks to the
single market; see in 't Veld, J. (2019), Quantifying the Economic Effects of the Single Market in a
Structural Macromodel
[https://economy-finance. ec. europa. eu/system/tiles/20 1 9-02/dp094_en.pdf], European
Commission, Discussion Paper 094, February 2019.

3. Cambridge Econometrics (2024), London's economy after Brexit: Impact and implications
[https://www.camecon.com/what/our-work/londons-economy-after-brexit-impact-and-
implications/]

4. Vandermeeren, F. (2022), 30 years of single market - taking stock and looking ahead
[https://favis. inet. bundesbank.de/csdav/nodes/55599987 1/30-years-single-market-taking-stock-
and-looking-ahead_en_]

, Single Market Economy Papers.

5. European Commission (2021), Directorate-General for Internal Market, Industry, Entrepreneurship
and SMEs (Small and medium-sized enterprises), Mapping and assessment of legal and adminis-
trative barriers in the services sector - Summary report
[https://op.europa.eu/en/publication-detail/-/publication/6d8d8858-a756-1 1eb-9585-

O1aa75ed7 1a 1/anguage-en]
, Publications Office, 2021, p. 4.

6. Bhatia, A. V. et al., A Capital Market Union for Europe
[https://favis. inet. bundesbank.de/csdav/nodes/55599987 1/A-Capital-Market-Union-For-Europe-
46856_]
, IMF (International Monetary Fund) Staff Discussion Note, September 2019.

7. Carstens, Agustin, Where are we on the journey toward price stability?, Speech at the Statistisch-
Volkswirtschaftliche Gesellschaft (SVG (Statistisch-Volkswirtschaftlichen Gesellschaft)) Basel, 22
January 2024. "Achieving higher and sustainable growth can only be accomplished by boosting
productive potential through measures enhancing the supply side and boosting innovation. This
requires renewed efforts to design and implement structural reforms in product and labour
markets, which have slowed considerably over the past two decades.

10.

11,

12.
13.

. "National Regulatory Control Council (2023), Positionspapier des Nationalen Normenkontrollrates

zum Entwurf eines Gesetzes zur Anderung des Onlinezugangsgesetzes sowie weiterer
Vorschriften
[file:///C:/Users/03504bq/AppData/Roaming/OpenText/OTEdit/EC_favis/c55599987 1/ozg-
positionspapier.pdf]

,p. i.

. European Commission (2024), Europe's Digital Decade: digital targets for 2030

[https://commission. europa. eu/strategy-and-policy/priorities-20 1 9-2024/europe-tit-digital-
age/europes-digital-decade-digital-targets-2030_en]

Allianz Risk Barometer
[https://wwwaallianz-trade.de/wissen/wirtschafts-news/allianz-risk-barometer-2024-
geschaeftsrisiken. html]

(2024)

Peace Research Institute Oslo (2023), Conflict Trends: A Global Overview, 1946-2022
[https://cdn. cloud. prio. org/files/dc754702-b 1ec-4787-97bb-
7a41*187036a/Obermeier%20Rustad%20-

% 20contlict% 20trends %20a%20Global% 200verview%20 1 946-
2022%20PRIO%20Paper%202023.pdf?inline=true]

, p. 10.

Fukuyama, F. (1989), The End of History?, p. 4.

Deutsche Bundesbank (2020), Consequences of increasing protectionism

[https://www.bundesbank.de/resource/blob/822438/306c76bad72 14946ac90075a44269 1ad/mL/2020-

01-protektionismus-data.pdf]
, Monthly Report, January 2020, pp. 45-66.