01 March 2014

BoF/Liikanen: Ensuring economic and financial stability in Europe

Speaking at Harvard University, Liikanen said that the institutional and legislative changes taken in response to the recent crisis represented a major and real step forward in European integration.

The EU has often been contrasted with the US. One of the differences is that whereas the US has its Constitution, which was signed more than two centuries ago and has been remarkably stable ever since, the European approach to integration is evolutionary and gradual. This reflects political realities. The EU is not a country, but a unique union of nation states. The development of the EU reflects more the concrete challenges faced on the path of integration than any political theories. For better or worse, the union has moved forward as a result of successive crises which have always prompted the next reform.

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The institutional developments which I have reviewed (see full speech) were not mainly directed towards managing the recent crisis, which fortunately seems to be gradually abating in Europe. They are meant to prevent future crises, to avoid the repetition of the painful experiences of the last five years. But the reforms have served a purpose also in the present situation. They have contributed to the restoration of confidence in the financial markets so that tensions in the bond market, which peaked in 2011 and 2012, have reduced and the interest rate spreads between the highly indebted countries vis-à-vis the rest have narrowed.

The positive news is that the necessary financial adjustment in the euro area is now well under way. However, as we know, leveraging is fast and deleveraging is slow, so the process will take time. We can also see that competitiveness in the former deficit countries is improving. The current account deficits of the Southern European countries, as a whole, which were at unsustainable levels three years ago, have now vanished and turned into surpluses, so that these countries are no longer dependent on external financing. Also their budget deficits are shrinking. High unemployment remains, however, the biggest problem.

Due to the real adjustment which has taken place, and also due to the action taken by the ECB, the market conditions in the euro area have generally improved. Not only have interest rate spreads narrowed but also funding conditions have become better.

I want to conclude by saying that the institutional and legislative changes which have been taken in response to the recent crisis represent a major and real step forward in European integration.

The legislative and institutional achievements of the crisis years have not come easily. They are the result of a process which has tested the patience of the citizens and the financial markets alike. The crisis, and the enormous tensions which were created by the diverging financial situations of the member countries, created a climate where all initiatives to surrender national sovereignty were politically very difficult. But this makes the achieved progress all the more impressive, as it demonstrates how strong the underlying commitment to the practice and idea of European integration still is, more than 60 years after Jean Monnet was drafting the plans for the European Coal and Steel Community.  

Full speech

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