miroslav singer : sovereign debt crisis in europe – assessing the current european instruments – addressing the challenges ahead speech by mr miroslav singer, governor of the czech national bank, at the european parliament committee on economic and monetary affairs public hearing, brussels, 23 january 2012. * * * members of the european parliament, thank you for inviting me to this forum and giving me this opportunity to comment on the european financial stability facility ( efsf ). the last few weeks have brought us three new events that are rightly or wrongly regarded as game changers and i would like to discuss the efsf in the context of those events. they are : 1 ) the ecb ’ s long - term loans to commercial banks and the widening of the range of guarantees which the ecb accepts from commercial banks for them, 2 ) the fiscal pact and 3 ) the rating downgrades. i would like start by saying that the provision of liquidity to commercial banks in europe by the ecb gives us time to define more precisely the mission, design and operation of the facility as well its position among the institutions charged with resolving the debt crisis. if we want to reduce the probability that some european nations and their banking groups will face liquidity problems that they cannot solve by obtaining funds from the market, we need to eliminate the following uncertainties relating to the efsf : 1. it is not clear what benefits we expect from the efsf or how it is supposed to generate them. many objectives have been hinted at in the more than 18 months since it was created, but nothing specific has been implemented so far. yet each of the objectives is highly important, be it the issuing of protection certificates or the establishment of the special purpose vehicle or the purchasing of peripheral countries ’ bonds in the secondary market. 2. the ambiguity in the definition of the facility ’ s mission is indicated by the changes made both to its guarantee structure, even though the structure remains based on the “ per partes ” principle, and to its rules of operation during its short lifetime. the fact that the term efsf 2 has caught on for the new structure reveals just how fundamental these changes are seen to be. 3. uncertainty also exists on the issue of increasing the effective capital strength of the facility using concepts such as leverage ( via an spv ), protection / insurance, loss tranches and short - term funds. from the reputational perspective, these are exceptionally controversial issues, because many market participants interpret them as

##ommodative monetary policy, widespread uncertainty about prospective demand growth and the deleveraging by overindebted firms have held back private investment. in stressed euro - area countries, these difficulties have been compounded by limited access to credit, because of balance sheet repair in the banking sector, and the increased cost of capital, owing to financial fragmentation. fiscal consolidation has often implied massive cuts in public investment, which may cast a shadow on potential future output. 17. investment is the linkage between today ’ s demand and tomorrow ’ s supply. reviving investment – public and private, national and european – would thus go a long way towards addressing both cyclical weaknesses and structural challenges to future potential growth. indeed, as it has been suggested inter alia by barry eichengreen, lack of investment in infrastructure, education and training is another possible source of secular stagnation. d. concluding remarks 18. in many respects, we are travelling through unchartered territories. refocusing economic policies on sustaining aggregate demand, in particular stimulating investment, is a necessity. on the other hand, the forces of technological progress imply that much of capital accumulation may further save on labour inputs. be it the legacy of the great recession or the outcome of more engrained trends, some of our traditional policy tools appear to be increasingly ineffective. 19. central banking has devised new innovative ways to respond to the crisis. much closer attention is now being paid to the responsibilities of monetary policy for financial stability and, more generally, to interactions and possible conflicts between policies that foster price and financial stability. macro - prudential policies now feature highly on the agenda of financial authorities. with policy rates in major advanced economies virtually at the zero lower bound, unconventional monetary policies are increasingly considered. 20. yet, the main challenge is posed by the developments in the real economy. it is here that we must exercise our ingenuity. the business environment must be made more conducive to private investment. and investment in infrastructures has to return to be high in the policy agenda. in the euro area, policies should aim at keeping the cost of capital low, developing capital market sources of finance to complement bank loans, implementing structural reforms to improve expectations of more favourable aggregate demand going forward, reducing policy uncertainty. 21. in italy, the most urgent interventions are those which safeguard legality and efficiency in public administration. to repeat what i said last may in my concluding remarks to the bank of italy ’ s