15 June 2012

Rehn: Rebalancing Europe - Early confirmation of steps to rebuild EMU will underscore stability and solidity of euro

We are now at a defining moment for European integration. Europe is undergoing a difficult adjustment. This applies to both external and internal economic imbalances. This is reflected in the economic situation. For the EU on average, the economic contraction seems mild for now, but the average cannot hide the fact that growth is very uneven across Member States, and survey indicators point clearly to downside risks in the short term. The ongoing turbulence in financial markets, especially sovereign bond markets, is threatening the European economy.

Consistent fiscal consolidation remains a valid priority. Of course, the necessary consolidation should be brought about in as growth-friendly a manner as possible. It is therefore worth recalling that the reinforced Stability and Growth Pact is not stupid, but instead focuses on the structural sustainability of public finances over medium term, thus allowing for differentiation across Member States according to their fiscal space and macro-economic conditions.

This is reflected in the ongoing excessive deficit procedures and the country-specific recommendations under the European Semester. The Semester, which is already in its second cycle this year, is a key tool of economic policy coordination across the EU, ranging from fiscal policy to structural policy, labour markets, product markets, and network industries.

We have reformed economic governance in a way that anchors a stability culture in the EMU and enables sustainable growth. We have strengthened EU financial regulation and supervision. The banking sector is being recapitalised, and in many countries, restructured. These actions have contained the crisis – but not tamed it, not to speak of overcoming it. Yet, the counterfactual scenario, that of defaults and disintegration, would have led to a terrible depression. Still, it is evident that our actions have been insufficient with the view of the challenges and the length of the rebalancing process across Europe.

Thus we need to think beyond these acts and deeds, and we need to show what lies at the end of this difficult journey. In other words, we need to map out the direction and steps towards a full economic union to complete our monetary union, including through a financial union. Demonstrating the political commitment of Member States to the euro will be a key part of restoring confidence in the euro area. Under the direction of Michel Barnier, the landscape of financial services has profoundly changed. The Commission’s proposals have brought more market players under supervision, raised the stringency of regulation, created European supervisory agencies, and, last week, filled in a major missing piece, the proposal for bank resolution.

In my view, the main building blocks towards a financial union should include such common elements as a single rulebook on capital requirements, integrated financial supervision, a common resolution authority and a single deposit insurance scheme. All these common and integrated elements should be put together into the same overall framework, intended for the 27 Member States, while allowing deeper integration and stronger requirements for the euro area as necessary.

The basic principle is clear: the sharing of risk in the guarantee scheme calls for an integrated, strong supervision of the banking sector. There can be no further mutualisation of economic risk without deeper integration of decision-making. To move further in mutualisation, it is necessary to strengthen our stability culture. This basic balance should guide the prospective construction of both financial and fiscal union.

Full speech

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