23 March 2020

ECB: The state of play regarding the deepening agenda for Economic and Monetary Union

This article provides an overview of progress with various aspects of the deepening of Economic and Monetary Union (EMU). The start of a new legislative period for the European Union (2019-24) provides a natural and opportune moment to take stock of progress towards completion of the architecture of EMU.

The EU’s last two legislative periods saw significant progress as regards the architecture of EMU in response to the global financial crisis more than a decade ago. A banking union was established, with shared supervision of Europe’s largest banks at supranational level and a common framework for addressing and resolving ailing banks. The European Stability Mechanism (ESM) was put in place to support euro area countries facing deep economic crises. And a number of adjustments were made to the shared rules governing national fiscal and economic policies.

However, there is no room for complacency: EMU needs to become even more resilient to adverse economic shocks. An increase in private risk sharing (whereby firms and households diversify their assets across borders through integrated capital and banking markets) can help to mitigate local recessions by allowing local shocks to be offset using income received from elsewhere. An increase in public risk sharing (e.g. through some form of common fiscal policy or shared backstops that safeguard financial stability in times of crisis) can also help to attenuate local and even euro area-wide recessions. Such private and public risk sharing are still more limited in the euro area than they are in other monetary unions, such as the United States. At the same time, the governance mechanisms that help to ensure resilient policies at national level and seek to prevent harmful spillover effects between euro area countries could be strengthened further.

Concrete decisions and further work on a number of aspects of EMU are scheduled for the near future. This includes work on the banking union and the capital markets union (CMU), both of which remain incomplete, leaving scope to further increase the stability and integration of Europe’s banking and capital markets. Other initiatives include reform of the ESM as part of work in the area of crisis management, as well as the establishment of a budgetary instrument for convergence and competitiveness (BICC), which aims to help euro area countries to invest and implement reforms with a view to improving the structure of their economies. In addition, the European Commission is also reviewing the fiscal and economic governance framework that coordinates national policies and is set to table a proposal for a European unemployment reinsurance scheme as a way of enhancing the euro area’s ability to withstand economic downturns.

The ECB has a clear interest in increasing the resilience of the euro area’s institutional architecture. Sound countercyclical fiscal policies, sufficient financial resilience and cross-border private and public risk sharing are all important to the ECB in order to allow for more effective transmission of monetary policy with fewer side effects, enhance the alignment of euro area business cycles, complement monetary policy and give European banking supervision greater traction.

Against that backdrop, this article provides an overview of various different elements of the deepening agenda for EMU and identifies a number of outstanding issues.

Full article on ECB

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