luis de guindos : international spillovers of monetary policy and financial stability concerns speech by mr luis de guindos, vice - president of the european central bank, at the conference “ the ecb and its watchers xx ”, frankfurt am main, 27 march 2019. * * * introduction it is a great pleasure for me to speak at this year ’ s ecb watchers conference. given the topic of this session, i will start by referring to our recent findings on international spillovers of monetary policy and the related financial stability concerns for the euro area. i will then focus on our financial stability assessment at the present juncture. in doing so, i will briefly refer to an analytical tool we have employed to monitor and assess the banking system ’ s resilience. globalisation has not only caused inflation and output to become increasingly synchronised across countries. equity prices and financing conditions have become more synchronised, too. most of this synchronisation stems from ( common ) global shocks, but the effects of international spillovers of monetary policy are less obvious. in my talk today, i will touch upon issues surrounding these international spillovers, and whether they are of concern for the financial stability of the euro area. in a globalised and financially integrated world, spillovers from the monetary policy of one country to other economies are unavoidable. we can identify at least three international transmission channels : 1. the “ aggregate demand ” channel, through which monetary policy affects domestic demand and, thus, the demand for foreign goods. 2. the “ exchange rate competitiveness ” channel, through which monetary policy affects the exchange rate, meaning it changes the price of domestic goods relative to foreign goods. 3. the “ financial channel ”, through which monetary policy affects domestic financial conditions. when there are strong financial connections between countries, these conditions may change abroad as well. from these transmission channels, let me focus on the “ financial channel ” for the remainder of my talk. financial spillovers from us monetary policy to the euro area measuring international spillovers is not easy, because global shocks lead to economies moving in a synchronised manner for reasons unrelated to monetary policy. 1 in line with previous evidence2, recent ecb research identifies large financial spillovers from us monetary policy to global financial conditions, including euro area financial conditions. 3 more specifically, over the course of one month, monetary policy tightening by the federal reserve system drives up euro area corporate bond spreads

would hurt everyone, poor and rich countries alike, creditors and debtors. sharing the same currency inextricably links the economic destinies of the member countries. it means suffering the consequences of the behaviour of others, even when they are undisciplined. we cannot look away, as was done when the currencies of other countries were allowed to devalue in an effort to regain competitiveness. we need to restore order and prevent divergences, otherwise we shall be affected directly. we cannot even wait for someone else, such as the financial markets, to discipline our neighbour, neither can we threaten to push it into bankruptcy, because the contagion would be immediate. the analogy of the joint ownership that carlo azeglio ciampi has often applied to the european currency has never been so pertinent as in recent months. the awareness that the euro is a common good, to be safeguarded at all costs, has been repeatedly confirmed and led to courageous decisions. on the other hand, the public has been mobilised in support of joint intervention only when it perceived the possibility of losing the benefits that come from the acquis communautaire. this explains why on several occasions over the last year political leaders of various countries have said that the euro was in danger. this was aimed at building a consensus for measures which in normal times would have been very difficult to accept. this approach to the problems has fuelled tensions on financial markets and in the end required interventions on an even broader scale. instead of a broad and definitive plan, which would have solved the problem at its root, actions were taken which filled the gaps, one after the other, when it was needed. a second important aspect that has characterised the action in recent months concerns the difficulty of changing the european institutional structure towards greater integration. as i mentioned before, monetary unification has been designed in such a way that it does not involve the transfer of other powers to the european level. such a transfer is not possible without starting a complex procedure for amending the treaties. this makes it very difficult to make the next steps. this is why the financial support created to help countries in difficulty ( the financial stability facility ) has been defined so as to prevent it from being considered as a budget transfer mechanism. it will provide funding only at penalty rates and on condition of macroeconomic adjustment by the debtor country. ultimately it became necessary to change – even if only one paragraph – the union treaty