17 June 2013

ECB/Mersch: The European Central Bank's role in overcoming the crisis

Speaking at the UniCredit Business Dialogue in Hamburg, Mersch debated whether the euro area governments were living up to their responsibility of eliminating the causes of the crisis.

The ECB's core task is to ensure price stability. That has not changed, nor will it change. We have a clear mandate, which was conferred on us by the Member States’ governments at supranational level under the European treaties. It is virtually cast in stone. At the same time, we have operational leeway in choosing how to fulfil this mandate – provided that we stay within its limits.

All of our non-standard measures are only temporary. For a short time, an overly ample provision of central bank liquidity to the banking sector is not incompatible with our mandate to maintain purchasing power. We can adjust the interest rate for these operations at any time. And excessive liquidity is automatically returned: banks demand less liquidity as soon as the monetary transmission mechanism improves. This process is in full swing. The three-year longer-term refinancing operations that I referred to before will expire at the beginning of 2015. Many banks have, however, already repaid the funds they had borrowed. So the design of our non-standard measures is such that a special withdrawal strategy is not required.

At the same time, we are aware of the long-term risks to stability associated with extremely low rates and excessive liquidity over too long a period. It is hence imperative that repair efforts in other areas are carried out resolutely and thoroughly. The ECB is indeed making an important contribution to crisis management but it cannot resolve the crisis by monetary means. In the end, it can only win time for other policy sectors to carry out the necessary adjustments and reforms.

It is up to the governments of the Member States to live up to their responsibility. They need to remedy remaining deficiencies in the European governance framework. And they must gear their economic policies to the demands of an economic and monetary union. Important steps have been taken since the outset of the crisis. The Member States must now single-mindedly continue on the path towards a new and more robust political economy.

The first step taken was the establishment of an effective set of instruments for the management and resolution of crises in the euro area. Initially, crisis-related measures by the Member States and the International Monetary Fund (IMF) had had to be arranged ad hoc. Since October last year, the European Stability Mechanism (ESM) has replaced the European Financial Stability Facility (EFSF) that had been designed as a temporary measure. The ESM has the organisation structure of an intergovernmental body. With a view to the progressive deepening of European integration, its further development into a truly federal institution would certainly be more appropriate than any questioning of the ECB’s mandate.

The new measures taken at the European level have proved to be effective in countering contagion in the euro area in the most serious stages of the crisis. Financial markets and consumers are gaining renewed confidence in the euro area, even though the prospects for growth and employment remain weak over the medium term.

The detailed design of the "single resolution mechanism" is still the subject of debate in Brussels and the Member States’ capital cities. Without prejudice to any decisions thereon, I would like to highlight two elements that I regard as being particularly important when designing the single resolution mechanism: on the one hand, the geographical and institutional scope of applicability of the single resolution mechanism should be the same as that of the Single Supervisory Mechanism. A European resolution authority would ensure that decisions are taken in a timely and objective manner. A network of national authorities would fall short of what is necessary in this respect. Cases where a bank finds itself in a precarious situation call for swift and efficient action. A European resolution authority would be able to avoid unnecessary delays and overcome coordination-related constraints. That would also keep the resolution costs low.

Combining financial assistance with strict conditions has brought the negative economic trends in the programme countries to a halt. The economic downturn in some of the most strongly affected countries may even have bottomed out in the near future. What is crucial now is to ensure that the programme countries do not stray from the path of essential fiscal, financial and structural adjustment.

The second step undertaken was the strengthening of the framework for steering economic policy at the European level. It is aimed at preventing dangerous imbalances in both public budgets and current accounts more effectively in future. The Governing Council of the ECB has urged time and again that economic governance in the euro area be improved, calling for the Stability and Growth Pact to be strengthened, for procedures to be put in place to counter macro-economic imbalances and for the ceilings on public debt and deficits set out in the Stability and Growth Pact to be transposed into national legislation in all Member States. We welcome that the regulatory framework has been reformed accordingly. The European Commission will be submitting draft legislation on a common resolution mechanism at the end of the month. Thereafter, the Member States will need to ensure that we establish an effective resolution mechanism in addition to common supervision.

Full speech

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