andreas dombret : the euro – taking off or staying grounded? speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the american council on germany, chicago, 14 october 2014. * 1. * * introduction ladies and gentlemen, i thank you for the invitation and the opportunity to speak here today. there are surely few places more aptly suited for a meeting of the american council on germany than chicago. in the aftermath of the failed german revolution of 1848, chicago welcomed germans seeking political or economic refuge. the german population in chicago rose fivefold in five years, amounting to one - sixth of the total population of chicago in 1850. and the “ forty - eighters ”, as they soon became known, turned out to be only the vanguard of a sustained wave of german immigration into the us, and into the midwest in particular. in a sense, the person standing in front of you today is also part of this wave, since i originally hail from des moines. but i admit that this ripple is a rather belated one. charles de gaulle once said : “ there are no friendships between states, only alliances. ” my personal experience is a different one. i believe that in the case of the us and germany, our myriad personal and historical ties do translate into a friendship even in the public domain. but de gaulle is of course right in that relationships between states are defined by interests as much as by anything else. here, too, our countries are bound together tightly. being a central banker, i will confine myself to our shared interests in the economic and financial sphere. and being part of the eurosystem, i will concentrate on what is in the mutual interest of both germany and the us : the conditions for a sustained and stable recovery in the euro area. 2. the economic situation in the euro area the already modest economic recovery in the euro area faltered in the second quarter. seasonally adjusted gdp remained unchanged in spring. the biggest three economies – germany, france and italy – did not provide any growth impetus, with germany and italy contracting by 0. 2 % and france ’ s economy stagnating. euro - area gdp is still 2. 4 % below its pre - crisis level, and indicators suggest only a moderate upward movement in the coming quarters. looking at the recovery so far, one could be reminded of a starting aeroplane. it has entered the runway and begun to roll, but it not yet

for the biggest banks, these numbers are sizable by any measure, especially considering that the proposed basel iii leverage ratio is 3 %. doing away with the preferential tax treatment of debt could therefore provide a major boon for financial stability. of course, equity still carries a risk premium, since it comes first with regard to absorbing gains as well as losses. but if equity ratios are low, debt must bear a bigger part of total risks, which makes it more expensive – at least when banks are allowed to fail. correspondingly, higher equity ratios will lower the cost of a given unit of equity, since risks will be more widely shared, and the cost of debt will also go down. the total cost of capital will therefore be unchanged, regardless of the equity ratio. 5. conclusion ladies and gentlemen, let me conclude. with regard to macroeconomic imbalances, much has already been achieved in the euro area. but for the recovery to reach take - off speed, more is required in terms of structural reforms. to make sure financial turbulences do not knock the monetary union off course, resolution regimes should be strengthened so that banks do not hold each other ’ s loss - absorbing liabilities. and to further strengthen banks ’ equity buffers, the preferential tax treatment of liabilities should be abolished. thank you for your attention. de mooij, ruud a. and keen, michael and orihara, masanori, taxation, bank leverage, and financial crises ( february 2013 ). imf working paper no. 13 / 48. bis central bankers ’ speeches