andreas dombret : five theses on the future of europe speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the esmt open lecture, european school for management and technology ( esmt ), berlin, 14 february 2018. * * * dear jorg rocholl ladies and gentlemen thank you for inviting me to speak at the esmt open lecture. during my last visit to this university, i had the gratifying opportunity to moderate a speech delivered by christine lagarde. my talk today will be about the future of europe, and of the euro area in particular. currently, the euro area is witnessing a fully - fledged economic upswing. at year - end 2017, gdp had climbed by 2. 4 % overall. and the outlook is looking positive as well. many have upgraded their growth expectations – eurosystem staff projections for 2018 are at 2. 3 % for 2018. sentiment levels are at long - term highs. all these indicators suggest that momentum is strong in the euro area economy. what seems equally important is that the upswing is broadly based, meaning it has reached many countries and many regions. but of course, we cannot speak of synchronous developments, as countries still differ in terms of infrastructure, institutions, and political and economic philosophies – and for that matter, economic developments, too. apart from that, the current upswing should not distract from existing issues. banks in several member states are still saddled with huge volumes of non - performing loans. across the european union, they amount to about € 950 bn. at the same time, some member states are still vulnerable due to high levels of public debt. furthermore, indicators such as banks ’ holdings of sovereign debt issued by their domestic government suggest that the strong connection between a country ’ s government and banks domiciled there – the “ sovereign - bank nexus ", as it is known and which had played an important role during the euro crisis – continues to exist. finally, less than a year ago, populist movements which strongly opposed the euro area and the eu were perceived as a significant threat. while their political influence turned out to be rather low, risks do remain. all in all, there are a number of good reasons to reflect on the future of europe. i would like to use this esmt open lecture to discuss the following five theses. 1. first things first for the euro area financial architecture the

inflation. this effect, however, does not suggest the maastricht criteria to be revised. the inflation criterion already allows for inflation to diverge by 1. 5 percentage points from the three best performing members of the currency union. nor does the balassa - samuelson effect suggest to loosen the two percent ceiling for price - stability in the euro area, which leaves enough room for price increases due to catching up. sustainable convergence in inflation rates is crucial. inflation rates can be kept at a sufficiently low level only if other policies comply with the stability orientation. prudent wage policies will contribute to containing overall price developments. structural policy also has a role to play. currently, 25 percent of prices in accession countries are still administrated. microeconomic reforms and further price deregulation have to be carried out. only then can the price mechanism fully work through to the economy - a defining feature of a fully functioning market economy. fiscal policy is of special importance in this respect. excessive deficits are to be avoided. the public sector deficit is the decisive measure of a government ’ s demands on the financial markets. it is the benchmark for its stability orientation. last year general government deficits among the accession countries ranged from 0. 4 percent of gdp ( in estonia ) to 7. 1 percent of gdp ( in malta ). eight of the accession countries had not yet met the maastricht budgetary criterion. however, the debt criterion - public debt less than 60 percent of gdp - was met by a broad majority of the accession countries. there are still a few years in which to pursue convergence and to prove its sustainability. nominal convergence is not a goal to be reached at a certain point in time ; it is, rather, the natural and sustainable state of a stable currency union. apart from nominal convergence, real convergence is of importance in a monetary union. i use the term here in the sense of synchronicity of business cycles. the governing council of the european central bank designs monetary policy appropriate to the euro area as a whole. a country whose business cycle gets grossly out of step might suffer if it is subject to a monetary policy that is inappropriate to its national economy. however, marching in absolute lockstep is not necessary, as can be seen in the usa, where certain regions grow faster than others. growth rates of states and regions within a currency union may differ to some degree. it is the size of the gap between actual and potential growth rates