Completing the banking union should be seen as a priority, in particular by overcoming the current deadlock over its third main pillar, the European Deposit Insurance Scheme (EDIS) with a mutualized component. The commitment to deploy such a scheme would have a strong impact on citizens’ trust and would contribute to increased risk-sharing in the euro area. In addition, it would help align financial responsibility with the pan-European decision-making that already exists in the areas of banking supervision and resolution. The current misalignment makes EMU governance more prone to institutional and political frailty. As a complement, it is also crucial to eliminate certain regulatory barriers and practices that are hindering the emergence of a fully fledged European banking market. In addition, completing the capital markets union is essential to enhancing the euro area’s capacity to cushion macro-financial shocks and to providing a better environment to channel private investment. Currently, the limited development of equity markets and the sizeable home bias in portfolios have significant negative consequences for the smooth functioning of the monetary union. Indeed, they set a limit on the capacity of risk-sharing mechanisms in the euro area. Moreover, an enhanced capital markets union could improve the channelling of the abundant aggregate savings to satisfy investment needs in the areas of infrastructure, energy and innovation, in which private investment is crucial. For example, according to European Commission estimates, the energy transition will require additional investment of over € billion each year over the next decade.

As I have mentioned before, the medium-term stabilisation of existing government debt levels at around 60% (with inflation at 2%) was consistent with running a headline deficit of around 3% of GDP (see left-hand side figure in slide 4). In the current context, however, the observed prevalence of negative r-g differentials (see the right-hand figure in slide 4) would be consistent with government debt levels stabilising at a higher percentage of output. Given this situation, it is legitimate to ask whether a government debt level above 60% is now the correct figure? The question is not easy to answer, and it will depend on national considerations (the economic fundamentals in the medium-term, the vulnerabilities and resilience of the economy) and, of course, the prevailing financial and monetary conditions. Moreover, the current high levels of government debt evidence the difficulties of transitioning to the medium-term debt anchors. At present, converging towards a debtto-GDP ratio of 60% would require a substantial fiscal effort over a prolonged time frame. Using the historical average values of real growth, inflation and interest rates, the euro area would need to maintain a fiscal surplus of 1.1% of GDP over 20 years in order to reduce the debt ratio to 60% (see left-hand side figure in slide 5). This is substantially higher than the average primary deficit of 0.4% of GDP observed since 1995. For this constant fiscal effort to be at more plausible values, the macroeconomic environment would need to be far more favourable than it has been in recent decades.