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Banks across the euro area are now deleveraging and recapitalising, and the flow of credit is still hampered in several countries, mainly those in which households and firms are also trying to deleverage, while budget consolidation is under way. The functioning of the money market is severely impaired, credit is squeezed and the transmission mechanism of monetary policy is clogged.
The sovereign debt crisis came to a climax in mid-2012 when the risk of break-up seemed acute. Investors began shifting deposits away from banks in stressed jurisdictions, often to banks in countries where conditions were calmer. The deposit base fell in stressed countries. Correspondingly loan growth deviated greatly across the euro area. Small and medium-sized enterprises were, and still are, affected the most.
Despite the depth of the crisis, the exceptional “flow and stock adjustments” underway, and ongoing financial market tensions, there are still some strong components supporting the building of the new euro area framework and holding things together.
The first strength is the resilience of the single market, which has steadily transformed the now deeply interconnected euro area economies. Companies and banks have a European perspective and reach. We are each other’s stakeholders. Economic integration is a diffuse process. It is the true engine of European integration and is generating largely benign effects. The single market represents the intrinsic value of the euro area. It is a common good. It is an asset shared by all its citizens – a fact which is not given enough recognition as a stabiliser during these difficult times.
The second strength lies in the solidity of our financial infrastructures: they have withstood the full force of the crisis. The Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET2), has enabled money market access throughout the crisis and for all countries: the cumulated imbalances are now steadily receding. In 1998 there were 18 large-value payment systems: that number fell to six in 1999 and now there are two, which means that both efficiency and financial stability have been enhanced. Central clearing counterparties (CCPs) for securities and derivatives declined from 13 in 1999 to nine in 2012. This entails greater efficiency gains by pooling activities. And more is coming. In 2008, the Single Euro Payments Area started to take effect due to time-lags. And the securities settlement systems will change radically once TARGET2-Securities becomes operational. This project is fully on track.
The third strength lies in the widespread acceptance of the need for adjustments and reforms in all dimensions of the crisis. The political authorities have taken action. They are already overhauling the political economy of the euro area, and establishing new governance to restore fiscal sustainability and prevent and correct macroeconomic imbalances. The Stability and Growth Pact has been tightened up by the so-called “six-pack” of economic governance measures, including the Macroeconomic Imbalance Procedure (MIP), and they in turn have been complemented by the “two-pack”. Moreover, euro area countries are summoning up the courage to change – although it is painful in some regions. To quote Jean Monnet, one of the founding fathers of the European Union: “People will only accept changes under the pressure of necessity.” Indeed, change is under way in Europe. And the impressive political determination to reform together is not stopping at the national level.
Also a fourth strength is that as a result of the crisis, a “crisis management and resolution framework” has emerged at the European level – and it is working. The initial stage was a fiscal backstop, the European Financial Stability Facility, and then the European Stability Mechanism. Confidence is slowly returning to both financial markets and high streets, even if growth and job prospects remain weak – the latter two being lagging indicators of the recovery under way. All this shows that European countries can turn themselves around.
The ECB will be responsible for the functioning of the SSM. In practice, the ECB will rely heavily on existing national supervisors: their expertise and “proximity” to the supervised banks are essential for the SSM to be effective. No domestic aspect or concern must be overlooked. Even in the case of the systemic banks that will be directly supervised by the ECB, national supervisors will still be involved in on-site inspections. In fact, there will be joint supervisory teams.
The assignment of supervisory responsibilities to central banks mirrors the prevailing consensus among experts and academics. There are many synergies between monetary policy and banking supervision, and in our case there are benefits from sharing micro- and macro-information on monetary policy, bank supervision, and the oversight of payment systems.
Moreover, an important lesson from the crisis is that there can be no price stability without financial stability. Most of the time, monetary policy and financial stability measures work in harmony. Still, there are concerns. There are several things we need to do, notably, steer clear of the risks, as the ECB will be the prime liquidity provider for these banks; establish clear safeguards against any potential conflicts of interest between the various ECB functions as they could give rise to reputational risks. And at the same time we need to reduce costs.
The SSM also represents a huge logistical challenge for the ECB. We are working hard on this and are well aware that the rewards may be considerable. It is requiring a lot of preparation at many levels including:
In most of the stressed euro area countries this still requires tough choices across the generations and over time: e.g. education versus pension entitlements, infrastructure versus healthcare, research and development versus defence, and so on. Strengthening of tax administrations and treasury systems, expenditure control, privatisation will also be crucial. Reducing the costs of bureaucracy will matter more than ever across the euro area. There are varying needs for true innovation clusters à-la-Silicon Valley, as well as investments in scientific and technical education, research and development, encouragement of “angel investments”, and grassroots and sustainable banking. Labour markets need to become inclusive and fair in every country, while encouraging labour mobility, in particular in a monetary union. Greater competitiveness and sustainable growth of the whole euro area will then follow.