benoit cœure : the euro area's three lines of defence speech by mr benoit cœure, member of the executive board of the european central bank, at the conference " deepening of emu ", ljubljana, 2 february 2018. * * * for a long time, the european central bank has been at the forefront of macroeconomic stabilisation in the euro area. there ’ s broad agreement that without our unprecedented actions, the euro area would have fared far worse. even more people would have lost their jobs, and wages and prices would have stagnated for much longer, or would even have fallen. although our actions were bold and unparalleled, we acted within our mandate, as confirmed by the european court of justice. the establishment of the european stability mechanism, and the progress made in setting up a banking union, have fixed some of the shortcomings in euro area governance and instruments. these steps were important in easing the pressure the crisis has put on the ecb. but many of the institutional failings that caused and perpetuated the crisis remain unresolved. incentives to pursue sound policies remain too weak and stabilisation of shocks too difficult. these are deeprooted issues that cannot be resolved by a few years of above - trend growth. to assume that the current economic expansion will heal all wounds is naive. the euro area needs reform. as the central bank of the euro area, the ecb should not interfere in the details of what is mostly a political debate. but we have a stake in the success of the current discussion. without further reforms, the next crisis may well force the ecb to test the limits of its mandate. depending on the nature of the next crisis, policy action might require taking short - term rates much deeper into negative territory. or it might require purchases of assets that are riskier than public or corporate debt. or it may draw us dangerously close to monetary financing of governments. as things stand today, and given member states ’ still limited fiscal policy space, even a small downturn could create large economic and social costs. it could, once again, test the cohesiveness of the currency union. unless the euro area finds a way to change direction, to reform itself and to regain space for active macroeconomic policy, the same fractures we saw in 2012 could reappear and widen when the next downturn comes. many ideas for reforms are being floated, of course. some are bolder than

closer to 20 %. country - specific shocks remain unsmoothed to a large extent, mainly because cross - border equity risk - sharing is hugely underdeveloped in europe. a true capital markets union could significantly help to diversify and reduce risk. it would thereby limit the financial burden to be levied by governments in the case of adverse shocks. and it would broaden the scope of monetary policy transmission beyond the banking sector, making policy less vulnerable. finally, to avert banking collapses, governments in the past were forced to disburse large sums of public money in the pursuit of economic and financial stability. completing banking union will reduce risks for taxpayers and break the remaining link between banks and national governments. a european deposit insurance scheme is a precondition for a truly integrated banking system and single money. let us not forget that 86 % of our money is created by commercial banks. the transmission of the ecb ’ s monetary policy will always be incomplete as long as differences in depositor confidence prevail across the euro area. the second line of defence relates to the role of governments. even the most flexible and efficient markets cannot fully absorb very large shocks without imposing economic hardship on a considerable number of people. in other words, flexible markets come at a price. they increase uncertainty for employees and often require relinquishment. uncertainty, for example, is born of the fear of a loss of employment or of not being able to respond to today ’ s fast pace of change. but it is also born of the fear that governments themselves have been pushed to the sidelines as globalisation has proceeded. recent election outcomes around the world bear witness to this fear. the more exposed individuals are, the more likely a political backlash. governments can mitigate these effects. unlike the united states, however, the european union is not a federation. this means that, as a rule, stabilisation and the provision of security in the form of social services takes place first at national level. keeping governments solvent is a precondition for achieving that. as we saw during the crisis, if perceptions of sustainability among markets decline, then counter - cyclical spending can quickly become constrained. so we need to regain fiscal space, which means building adequate national fiscal buffers. the current broad - based economic expansion is contributing a lot to this end. but many countries are emerging from the crisis still bearing legacy burdens that could take decades to resolve. this leaves us vulnerable to divergence and