jose manuel gonzalez - paramo : the sovereign debt crisis and the future of european integration speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the oxford university european affairs society, oxford, 24 november 2011. * * * introduction ladies and gentlemen, thank you very much for inviting me to speak here this evening in the “ city of dreaming spires ”. the aims of the oxford university european affairs society – fostering understanding of political, social and cultural issues across europe – have never been more relevant than today. in the sovereign debt crisis, europe faces one of its greatest ever challenges. the question is how to confront it. we should learn from the present and the recent past. and we should look forward, since future prosperity in europe depends on our collective success in overcoming the crisis. citizens in both creditor and debtor countries have to look beyond national interests. ultimately, this can only be sustained through deeper common understanding and stronger sense of what it means to be european. the sovereign debt crisis will be the theme of my remarks today. i do not want to engage in the minutiae of the issue or signal any particular policy stance by the ecb. instead, i would like to take a step back from the crisis and reflect on what it has taught us so far about economic and monetary union in europe. obviously, i concentrate explicitly on the euro area, i. e. the seventeen countries sharing the single currency. the status and role of the united kingdom, the dynamics of the british domestic debate on europe, and the cooperation with the continent in addressing the crisis are not the focus of my remarks. i have three main propositions. first, membership of emu entails much deeper policy changes than were originally realised. in 1991, hans tietmeyer, the former president of the bundesbank, remarked that “ monetary union is not just a technical matter. it is in itself, to some extent, a political union ”. what has become clear is that countries that adopt the euro as their currency are required to adjust fundamentally the way in which they conduct their economic and financial policies. at the same time, ensuring overall stability requires far - reaching coordination in economic and financial governance. it would be difficult to understand that in the world ’ s second largest monetary area governance is outsourced solely to the markets and ratings agencies. effective governance of an economic area of such importance requires much closer economic and financial union. second, in

september ecb staff projections foresee average annual hicp inflation at between 3. 4 % and 3. 6 % in 2008, and between 2. 3 % and 2. 9 % in 2009. the higher inflation projections for 2008 and 2009 mainly reflect higher energy prices and, to a lesser extent, higher food and services prices than assumed previously. in this context, it is important to recall the conditional nature of the ecb staff projections. they are based on a number of assumptions that are of a purely technical nature and unrelated to policy intentions. in particular, the technical assumptions for short - term interest rates reflect market expectations as at mid - august. moreover, it should be noted that the projections are based on the assumption that oil and non - oil commodity prices, while remaining at elevated levels, will exhibit greater stability over the projection horizon than has been the case in recent months, in line with prevailing futures prices. it is the governing council ’ s view that, at the policy - relevant medium - term horizon, there are upside risks to the outlook for price developments. these risks include the possibility of renewed increases in commodity prices and of previous rises having further and stronger indirect effects on consumer prices. there is particularly a very strong concern that the emergence of broad - based second - round effects in price and wage - setting behaviour could add significantly to inflationary pressures. moreover, the upside risks to price stability could be aggravated by unexpected rises in indirect taxes and administered prices. against this background, it is imperative to ensure that medium to longer - term inflation expectations remain firmly anchored at levels in line with price stability. broad - based secondround effects stemming from the impact of higher energy and food prices on price and wagesetting behaviour must be avoided. the governing council is monitoring price - setting behaviour and wage negotiations in the euro area with particular attention. all parties concerned – in both the private and the public sectors – must meet their responsibilities in this regard. the governing council has repeatedly expressed its concern about the existence of schemes in which nominal wages are indexed to consumer prices. such schemes involve the risk of upward shocks in inflation leading to a wage - price spiral, which would be detrimental to employment and competitiveness in the countries concerned. the governing council calls for these schemes to be abolished. the monetary analysis confirms the prevailing upside risks to price stability at medium to longer - term horizons. in line with our monetary policy strategy, we take the view that the sustained underlying strength of monetary and credit expansion in the euro