andreas dombret : what does brexit mean for european banks? keynote speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at a conference of the association of german banks and the center for financial studies, goethe university frankfurt, frankfurt am main, 13 july 2016. * * * introduction ladies and gentlemen one of the words which were mentioned most during the last few days was ” confusion ”, followed by “ uncertainty ”. both terms express what many people felt after the british vote to leave the european union – which was not consistent with what experts had expected just before the event. the brexit could certainly mark a turning point for europe. as jurgen habermas, the german philosopher, put it in the german weekly newspaper “ die zeit ” : “ i didn ’ t expect populism to beat capitalism in its country of origin. in view of the banking sector ’ s existential importance for the uk and the media and political power of the city of london, it seemed unlikely that questions surrounding identity would triumph over other interests. ” 1 we were all in the financial sector somewhat confused on the morning of 24 june and probably still are, given the many unanswered questions we are now facing. the full consequences of brexit will only become evident as time progresses – because formal relations between the united kingdom and the eu will be decided by a negotiation process that has not yet begun. so far, a british motion to leave the european union according to article 50 of the treaty of the european union has not been made. only after this process has been settled will we be able to better assess the full consequences of this vote – both in economic and political terms. but people are seeking orientation and want to discuss the matter. therefore, panel discussions such as the one being held here today are of immense value, and i wish to thank both the association of german banks as well as the center for financial studies for their initiative. let me use this opportunity today to comment both on the potential eco - nomic and political consequences of the united kingdom ’ s referendum decision. banks face immediate economic consequences while the brexit decision has caught most europeans off - guard, its immediate financial consequences have materialised as predicted. all in all, the reaction of financial markets to the brexit news was by and large consistent with expectations. the news evidently came as a surprise, but there was no panic : the british pound came under downward pressure

##terity policy. that ’ s because, all told, the euro - area countries have saved a handsome €1, 000 billion or so in interest, based on the 2007 interest rate level. and yet the large member states of france, italy and spain were precisely the ones which spent every last bit of what they saved in interest payments, instead of using it to pay off their debts. bearing this in mind, it is undoubtedly a welcome sign that the new french president has committed to comply with the fiscal rules and announced his intention to roll out additional economic reforms with a view to boosting french growth. a strong french economy will ultimately be a boon for the euro area as a whole. given the subdued price pressures, it is still appropriate, in principle, for monetary policy to be in accommodative mode. but in light of the ongoing economic recovery and a consensus inflation rate forecast of just under 2 % for 2019, it is certainly legitimate to ask when the ecb governing council should set its sights on normalising monetary policy. equally, there are good grounds to have a diversity of views about the right degree of monetary accommodation – all the more so, given that the highly accommodative monetary policy stance is mainly being achieved through the deployment of non - standard instruments. as you are no doubt aware, i take a critical view of the large - scale purchases of government bonds in particular. in a currency union, purchase operations of that kind blur the especially important boundaries between monetary and fiscal policy. eurosystem central banks have now become the euro - area countries ’ biggest creditors. at the end of the day, this can lead to political pressure being exerted on the eurosystem to maintain the very accommodative monetary policy for longer than appropriate from a price stability standpoint. after all, in the context of asset purchases, changes in monetary policy impact more directly on governments ’ funding costs than 2 / 6 bis central bankers'speeches interest rate moves. and that ’ s naturally also problematical in view of the disciplining effect of the capital markets on government finances. hence my view that government bond purchases are an instrument of last resort - one which should mainly be used to fend off deflation. but i ’ ve said in the past that the fears of deflation are overblown, and since then they have become even less of an issue. what is more, looking at the monetary policy stance, there is no disputing that the