26 November 2013

ECB/Mersch: Economic and legal limits of central banking

Mersch discussed the institutional and legal foundations of the EMU. "We need to stay ambitious to continue institutional and structural reforms in order to facilitate the economic recovery and reduce fragmentation in the euro area."

The ECB’s independence and the price stability mandate conferred upon ECB by the EU Treaty provided a firm anchor for our action during the stormy times of the crisis. But there were also shortcomings in the EMU institutional framework that the crisis has revealed.

We need to stay ambitious to continue institutional and structural reforms in order to facilitate the economic recovery and reduce fragmentation in the euro area.

In this vein the Banking Union has to ensure a functioning European financial market, where banks are properly supervised and can be wound up efficiently if necessary. This will not only ensure greater integration and stability for the financial market. It also means putting EMU as a whole on a sounder footing. And for central bankers, this avoids compromising the primacy of price stability.

The legal foundations of the EMU and in particular the independence of monetary policy enshrined in the Treaty served as crucial guideposts for the ECB’s monetary policy also during the course of the crisis. Other parts of the EMU institutional framework, however, proved to be porous. Those foundations should also guide our work on the design of the Banking Union. The aim is to create a level playing field for all banks with no uncertainties or loopholes distorting competition in the Single Market.

Both banking supervision and monetary policy share a number of institutional foundations that will ensure their effectiveness: a precise mandate, independence from euro area governments and strong accountability towards the European people.

Both banking supervision and monetary policy face limits to their effectiveness. Structural reforms fostering economic growth, sound fiscal policies ensuring sustainable public budgets and an effective resolution mechanisms to deal with non-viable banks without the involvement of tax-payers are the best to ensure both effective and stringent supervisory policies and – what Walter Eucken has called – the primacy of monetary policy, that is a monetary policy fully focused on the delivery of price stability.

Full speech

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