Driving European governance reform This crisis has also demonstrated that, despite the progress of recent years, we need further improvements in euro area governance. Specifically, the momentum of the recent agreements to create a permanent European macroeconomic stabilisation fiscal mechanism should be harnessed to allow for greater risk-sharing, e.g. European unemployment insurance. Completing the Banking Union is also a priority, with the approval of a fully pooled European Deposit Guarantee Scheme. Further, we must move towards lowering the barriers to a genuine Capital Markets Union. 5. Ensuring the sustainability of public finances To conclude, let me emphasise the importance of ensuring the sustainability of public finances. As earlier stated, after the pandemic we will be facing the highest level of public debt in many decades. The persistence over time of these public debt levels would reduce the fiscal policy headroom for addressing adverse shocks, it would expose the economy to a situation of chronic vulnerability ahead of changes in sentiment on financial markets and it would weigh down our growth capacity. In the medium term, then, we must undertake a programme of gradual deficit and public debt reduction. Let us first take the Stability and Growth Pact as an anchor, and assume that, once the effects of the crisis have abated, an annual reduction in the structural deficit of 0.5% of GDP is applied until a balanced budget is attained. It may then be estimated that, under certain assumptions, public debt relative to GDP would tend to progressively fall.

Fiscal policy will have to play a predominant role in the strategy needed to attain the objectives set in this area, both to deter environmentally harmful activities, through an internationally harmonised tax system, and to foment the public and private investment needed to develop cleaner technologies, and to alleviate the social costs of the transition. The financial sector is also called on to play a key role. To do so, it is crucial that it incorporates into its decision-making the risks associated with climate change. Environmental stress tests devised by supervisors will be a useful instrument in this connection, as will the international harmonisation of a taxonomy that provides transparency on the activities that contribute to the transition to a low-carbon economy. 4.6. Maintaining a sound financial sector I devoted my last appearance before the Parliamentary Economic Committee to analysing the challenges this crisis will pose to the financial sector. I should in any event like to stress today that, from the medium-term standpoint, the current crisis will entail additional downward pressure on profitability. That highlights the need for banks to urgently address some of the challenges associated with digitalisation and the management of cybersecurity risks, along with others of a reputational nature. An additional drive must be made to reduce operating costs and to achieve efficiency gains, to invest in technology and to improve banks’ conduct and reputation. 4.7. Addressing the new structural challenges after COVID-19. All the challenges I have mentioned were prior to the pandemic breaking.