vitor constancio : strengthening european economic governance – surveillance of fiscal and macroeconomic imbalances speech by mr vitor constancio, vice - president of the european central bank, at the brussels economic forum, brussels, 18 may 2011. * * * thank you very much for the invitation to participate in this panel today. the session is intended to focus on “ surveillance of fiscal and macroeconomic imbalances ”, which arguably is the most important strand of the economic governance package. but one should consider that this package – beyond the 6 legislative acts – also contains three other strands : the euro plus pact, the creation of the european stability mechanism and the setting - up of the european system of financial supervision. a fundamental strengthening of economic governance in the euro area requires simultaneous progress in all three areas. the first strand is necessary to prevent and correct imbalances ; the second to ensure the conditions for future growth and competitiveness ; the third to provide a last resort backstop if crises still occur, the fourth to guarantee financial stability, in particular in the banking sector. that said, prevention and correction of fiscal and macroeconomic imbalances must be given priority as it is the pre - condition for sustainable economic growth and financial stability. as the ecb has stressed on a number of occasions, here a “ quantum leap ” forward is needed in strengthening the stability and growth pact and creating an effective new framework for surveillance of macroeconomic imbalances. important negotiations are ongoing between the commission, the council and the european parliament to reach agreement on the legislative package of economic governance reforms. for this agreement to reach the necessary “ quantum leap ”, the following elements are essential. first, greater automaticity is needed in all surveillance procedures, including the new macroeconomic surveillance framework. the council should have less room for halting or suspending procedures against member states. strict deadlines to avoid lengthy procedures and the deletion of escape clauses would also contribute to automaticity. this is critical to ensure the credibility of the new framework and address spillovers in a timely manner. second, enforcement tools need to be more effective. in addition to financial sanctions, political and reputational measures would help foster early compliance, as would the application of earlier and more gradual financial sanctions within the macroeconomic surveillance framework. discretion to reduce or suspend financial sanctions is undesirable as it strongly reduces effectiveness and sets the wrong incentives. third, more ambitious policy requirements would better match the current reality of the euro area.

ecb with an effective set of powers that encompass all the elements of the toolbox related to micro - prudential supervision. we can say that the ecb tasks would concern all the span of life of credit institutions, from their birth ( i. e. the authorisation to operate ) to their death. more specifically, the ecb will have the tasks to grant and withdraw authorisations to credit institutions, to assess mergers and acquisitions concerning credit institutions under its responsibility, to ensure the compliance with pillar i and ii requirements and, to carry out consolidated supervision. the ecb will be able to fulfil the tasks allocated to it both by using the direct supervisory and investigatory powers conferred by the ssm regulation, as well as asking for the assistance of national supervisory authorities as appropriate. at this point in time you may wonder what would be the consequences for your banks, once the proposed ssm regulation would be finally adopted and the new system will enter into force. an important point to stress is that the legislative framework agreed by the council bis central bankers ’ speeches ensures full continuity with the existing supervisory system. as i said, the ecb will carry out its tasks within the single supervisory mechanism, working together with national supervisory authorities. therefore, there would be no additional burden for the industry. on the contrary, banks are expected to greatly benefit from the fact that the ssm will facilitate the application of the single rulebook and thus likely reduce the compliance costs for banks with cross - border presence across the participating member states. the ssm and macro - prudential supervision another important element of the ssm regulation is the conferral on the ecb of macro - prudential tasks. let at this point, turn our view back for some years. in most countries, before the crisis, banking supervision was essentially “ micro - based ”. it was mostly focused on ensuring the safety and soundness of individual institutions while taking the rest of the financial system as given. the implicit assumption was that stable individual institutions would automatically deliver a stable system. this micro - based supervisory approach is likely to underestimate the systemic component and is not able to internalise and target the negative externalities that could build up as a result of increased risks for the system as a whole. the lending booms that we have experienced in some euro area countries before the crisis offer a good illustration : during the upswing banks reported high levels of profitability and low levels of measured risk. both of these