yves mersch : institutional overhaul of the euro area – progress and remaining challenges speech by mr yves mersch, member of the executive board of the european central bank, at a conference, organised by the association europeenne de droit bancaire et financier luxembourg, luxembourg, 5 may 2014. * * * ladies and gentlemen, it is a pleasure to be with you today to discuss the institutional overhaul of the euro area, a few days ahead of the “ europe day ” commemorating the schuman declaration of 1950. introduction : from schuman to delors with this declaration, robert schuman set the path towards the creation of the european coal and steel community, the first of a series of supranational european entities that would ultimately become today ’ s european union. the aim of this initiative was clear from the outset, as put in schuman ’ s words : “ in this way, there will be realised simply and speedily that fusion of interest which is indispensable to the establishment of a common economic system ; it may be the leaven from which may grow a wider and deeper community between countries long opposed to one another by sanguinary divisions ” 1. less than forty years later, the delors report which laid out the rationale and framework of economic and monetary union followed a similar logic. beyond its economic motivations, the introduction of the euro had also a political dimension : by setting up a common economic and monetary system, the founding fathers of the euro strived to create a deeper community among euro area member states. due to the severity and duration of the current economic crisis we tend to forget that the euro – as a broader political project – has been and remains very successful. the geopolitical turmoil at the doors of europe reminds us that political stability and security should not be taken for granted. this does not mean that the title of today ’ s conference has lost its relevance. on the contrary : the crisis has shown that in order to reap all the economic benefits of the euro – and more generally of the single market –, a number of reforms have been necessary. in adopting these reforms, a delicate, yet essential equilibrium has to be found between those who wanted to follow the path of further integration and those wishing to remain outside. but both dimensions, the euro area on the one hand and the broader eu on the other hand, are not incompatible. indeed, a strong single market is essential for a well - functioning single

the current economic environment in a deterioration of the headline budget balance but not in excessive deficits. the importance of the functioning of automatic stabilisers in the euro area should not be underestimated. in the euro area, the contribution to economic stabilisation made by these stabilisers is generally higher, on average, than in other industrialised countries due to the high sensitivity of revenues and expenditures to economic fluctuations in europe. however, we have serious doubts about the efficiency of discretionary fiscal policies. activist policies may have pro - cyclical effects, given the time - lags involved. in addition, they risk undermining the confidence of economic agents in the fiscal framework and in its stability. as regards the monetary policy of the ecb, let me start by presenting the principle which forms the foundation of the macroeconomic institutional framework in the euro area. this principle is that of a sound monetary policy aimed at maintaining price stability. the ecb's governing council takes its monetary policy decisions within the framework of a welldesigned monetary policy strategy. less than one month ago, we confirmed our definition of price stability as a " year - on - year increase in the harmonised index of consumer prices ( hicp ) for the euro area of below 2 % ". we also confirmed our medium - term orientation. at the same time, we clarified that in the pursuit of price stability we aim to maintain inflation rates below but " close to 2 % " over the medium term. this clarification underlines the ecb's general commitment to provide a sufficient safety margin to guard against potential risks of deflation. it also addresses the issue of the possible presence of a measurement bias in the hicp and the implications of inflation differentials within the euro area. let me turn now to the factors which need to be taken into consideration by monetary policy at the current juncture. the first few months of this year were dominated by the uncertainty related to the escalation of geopolitical tensions in the middle east. this environment, which was also characterised by rising oil prices, was clearly not beneficial for investment and, more generally, economic activity in the euro area and at the global level. as a result, economic growth was relatively weak in early 2003 and expectations for economic growth, at least for this year, have had to be scaled back. the rapid conclusion of the military activities was accompanied by a normalisation in oil prices and a rebound in stock markets. both developments indicate that