yves mersch : deepening emu - political integration and economic convergence speech by mr yves mersch, member of the executive board of the european central bank, at the conference on " economic and monetary union - deepening and convergence ", linz, 5 july 2018. * * * ladies and gentlemen, we could have known better. the discussions on the first meaningful blueprint for a european monetary union already highlighted challenges that we have not yet fully overcome. the plan to establish a single currency by 1980, drawn up in 1970 by a committee of experts chaired by the then luxembourg prime minister pierre werner, referred to the need for economic policy coordination amid insufficient economic convergence and the absence of fiscal transfers which would require a political union. later proposals, including the maastricht treaty of 1992, failed to sufficiently tackle the inherent tensions of a currency without a state. although europe has recovered from the most severe financial and economic crisis in a century, which threatened the very functioning of our democracies, it is still suffering from these shortcomings. as the euro is a shared currency, euro area countries with low productivity growth cannot resort to exchange rate depreciation [ currency devaluation ] ; and the more dynamic countries, whose currencies would normally appreciate, end up with stubbornly low inflation rates. the only way out is through internal devaluation, which entails lower wage costs and higher productivity, but this encounters social resistance and fosters populism. recent political propositions in italy were kept in check only by market pressures and the sanity of established institutions – national and european alike. but recognising the design flaws of the currency union cannot mean calling the whole project into question. too much financial, political and social capital has been invested, and the cost of a break - up would be prohibitively high, with devastating economic, social and political consequences. the only viable option is to continue the deepening of our economic and monetary union ( emu ) through political and economic convergence. both channels are indispensable for emu. today, i will focus on three areas in which it is vital to make progress. first, we have to more actively pursue fiscal and structural reforms. second, we need to further reduce risks and fragmentation in the financial sector. and third, we must decisively strengthen the institutional architecture of emu to weather the challenges of today and tomorrow. notwithstanding robust economic expansion, the euro area remains vulnerable to adverse shocks. the risk of

for banks to be able to plan ahead and obtain liquidity, even if they are deemed to be failing or likely to fail or if a resolution process has been activated. the provision of central bank liquidity – be it through monetary policy credit operations or emergency liquidity assistance – should however by no means be automatically assumed in resolution planning. resolution financing is foremost a government task, now complemented by the rules and procedures applied by the single resolution board and the national resolution authorities within the framework of the srm. central banks provide liquidity, not solvency support. and funding gaps that cannot be addressed by the industry or through the srf should be filled, ultimately, by or on behalf of member states or intergovernmental institutions. strengthening the institutional architecture of economic and monetary union the elements mentioned so far can be mutually reinforcing. in the fiscal and economic realms, common instruments can bolster convergence, thus providing a shield against bad equilibria and economic scarring in crises. and pursuing the right policies helps to create the policy space to address shocks in the first place. in the financial realm, backstops reduce risk across the system by containing market panics when a crisis hits. and a strong resolution framework ensures that very little public risk - sharing is actually needed when a crisis hits, as the costs are primarily born by the private sector. nevertheless, it is a fact of economic life that the risk of significant downside economic shocks can never be fully eliminated. this is why an effective crisis management framework remains indispensable. there is thus merit in strengthening the role of the esm in managing crises, provided that governance arrangements are duly reviewed with a view to integrating them into the federal set - up of the eu. should the esm remain outside the eu legal order as an intergovernmental body, any future discussion of the tasks that could be conferred on the esm in the field of economic governance must respect the existing competences conferred on the eu and its institutions under eu law. market incentives that appropriately support prudent fiscal policies and reduce risks on bank 4 / 6 bis central bankers'speeches balance sheets may usefully support the implementation of the existing rules - based framework. to reinforce the credibility of the no bailout clause, and better anticipate debt sustainability problems, the esm needs to be able to distinguish early on between liquidity and solvency problems. 10 more clarity in our policy frameworks would allow us to pick up the can at