11 July 2014

ECB: 'Investing in Europe' speech by Benoît Cœuré, Member of the Executive Board

Economic and Monetary Union (EMU) is a political triathlon. It requires resilience and resolve to perform well at all times in the three disciplines of a currency union: fiscal policy, economic policy and financial policy. EMU is a team effort. Only if every participant performs well can the euro area team be strong. This is the most important lesson from the crisis.

The European economy is undergoing a moderate recovery, but complacency would be unwarranted. To really overcome the crisis, there are some remaining major challenges still to be faced. The euro area is not in a financial crisis anymore, but it must still contend with high debt, low growth and unacceptably high unemployment. These are reason enough to remain alert and continue acting. In recent years, economic policy-making rightfully focused on re-establishing the most important necessary condition for growth: stability. For companies to invest, for firms to hire, for households to consume, a stable economic environment is paramount.

There are three relevant dimensions of economic stability: price stability, financial stability and macroeconomic stability, including the health of public finances. In all these areas, we have made substantial progress in recent years. During the crisis, the ECB took all appropriate measures to ensure that price stability provided an anchor in an uncertain and volatile economic environment. As for financial stability, the establishment of the European Stability Mechanism and the launch of banking union, with its Single Supervisory Mechanism and Single Resolution Mechanism, have been milestones in this respect. As a third dimension, the crisis has shown us the kind of existential threat to monetary union that can be brought about by the build-up of excessive imbalances, i.e. by the lack of fiscal and macroeconomic stability. New growth will not be generated by new debt. Sound fiscal policies are essential for growing out of debt. Therefore, the existing rules should be applied in a credible manner.

That said, we cannot claim “mission accomplished”. What has been achieved so far is not enough. The answer to the remaining challenges could take the form of a “convergence process 2.0”, which should have an agreed timeline and milestones. But convergence can only be sustainable if it is associated with a commensurate deepening of integration, if it is a race towards best practice institutions and policies rather than towards mere nominal outcomes. In this context, structural reforms, if properly designed, lead to greater prosperity in each country and, at the same time, ensure greater resilience of EMU as a whole, thereby contributing to economic and social stability. Growth and stability are therefore mutually reinforcing.

The convergence process should consist of two legs: on the one hand, it should underpin the convergence of economic policies and structures at the national level. On the other hand, it should facilitate joint action.

At the national level, convergence implies that euro area governments need to step up structural reforms, in particular those which have the greatest efficiency gains given the relative distance to best practices. And policy-makers should pay due attention to ensure that the burden of the adjustment effort is shared fairly.

The convergence in national structures could be complemented by joint action at the European level to increase investment and by the transfer of certain budgetary responsibilities to the European level with a view to strengthening risk-sharing within the currency union. But joint action can only occur once trust has been restored across countries and within countries, and the convergence process has advanced successfully. The level and the form of budgetary responsibilities, and how they are matched by appropriate democratic arrangements, should emanate from the political process.

The biggest threat to the Single Market is not euro area integration: it would be euro area stagnation. The challenge of making the EMU work is far from over. Let’s get ready for the next stage of the race.

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