andreas dombret : looking to the future – what comes next in terms of european financial integration? speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the south african institute for international affairs, johannesburg, 10 april 2015. * 1. * * introduction ladies and gentlemen thank you for inviting me to speak at the south african institute for international affairs. i appreciate the institute ’ s objective of conducting evidence - based policy research as part of an international dialogue. it is therefore a great pleasure to be here today to take part in and to promote such an international exchange of ideas. a dialogue is essential in the age of globalisation, in which countries are no longer isolated but part of a closely interconnected community. and this community consists of a growing number of countries. over the past decades, we have seen the emerging economies steadily being integrated into the global economy. and looking to the future, i firmly believe that the role played by emerging economies will become greater still. your country is a prime example : south africa plays a leading role in sub - saharan africa and is also a respected member of the g20, reflecting its role in the world economy. a globalised economy offers huge potential to all its members. nevertheless, while we all share the benefits in good times, we also have to share the burdens in bad times. the global financial crisis has highlighted how closely the world has grown together and how quickly a problem in one corner of the world can spread around the globe. this truth applies all the more to countries sharing a common currency such as the member states of the common monetary area here in southern africa or the euro area in europe. let us take a closer look at the euro area and the challenges it is currently facing. back in 1999, 11 european countries adopted the euro as their common currency. today, the single currency is shared by 19 countries and more than 300 million people, which in my eyes makes it a success story. that being said, it has not always been plain sailing. in the wake of the global financial crisis of 2008, the euro area slid into a financial crisis of its own. this was compounded in 2010 when greece entered into a sovereign debt crisis, leading to other member states suffering a sudden loss in confidence, which eventually brought the euro area to the brink of collapse. extensive rescue packages by the governments along with non - standard measures taken by the european central bank helped to calm the markets and prevented the crisis

from escalating. to some commentators, the current situation might look similar. greece ’ s newly elected government objected to complying with the financial assistance agreements and intended to withdraw some of the reforms that had already been adopted. there were even brief calls for further debt relief. however, after intense negotiations among the finance ministers of the euro area, the greek government settled for requesting an extension of the current programme. after the greek government had also committed to pushing ahead with economic and fiscal reforms, the finance ministers of the euro area approved a four - month extension of the programme. the details of a new financial assistance programme need to be worked out by summer. greece certainly needs further assistance from the rest of the euro area. however, further assistance can only be granted if greece continues with its efforts to restore sound public finances and competitive economic structures. bis central bankers ’ speeches some observers see these developments as an indication that financial integration in europe has failed. i see these developments as an indication that financial integration in europe has to go further. let us take a look at three areas where further integration could be the way forward for europe. 2. fiscal union – beyond the horizon the first area is public finances. and in order to understand the core of my argument, it is important to be familiar with the particular features of the european monetary union. the european monetary union is special in that it combines a single monetary policy with national fiscal policies. the monetary policy for the 19 countries of the euro area is decided by the governing council of the ecb in frankfurt. however, the fiscal policies of the 19 euro - area member states are a matter for the national policymakers – each country decides on its own government revenues and expenditures. this imbalance of responsibilities gives individual countries an incentive to borrow – a “ deficit bias ” is built into the system. this is because the negative consequences of borrowing are spread across all the member states of monetary union – for example, by means of a higher interest rate level for all of them. our objective should be to counter that “ deficit bias ” to ensure a stable monetary union. this can only be achieved by realigning responsibilities – liability and control have to be in balance. and one way to rebalance liability and control is deeper fiscal integration. if we were to take this path, the european level would gain certain control rights over national budgets. this would amount to what is known as a fiscal union. however, such a step would depend on the countries of the euro area