03 September 2012

VP Rehn: Towards a genuine economic and monetary union - Further development of financial or banking union should be seen as top priority

Let me yet outline the main elements of our proposal, as it is a cornerstone of our comprehensive crisis response and of the future of EMU and the euro.

The financial system in Europe is highly integrated. As a consequence, there is great potential for financial instability that originates in one country to spill very rapidly over to other countries. The potential for cross-border contagion in crises is even greater for euro area countries.

The Single Supervisory Mechanism will therefore apply to all euro area Member States, but will be open to the participation of other Member States that wish to embark on a path of deeper integration. In such cases, the Member State concerned is expected to make a legal commitment and give assurances that the decisions taken by the ECB will be binding for their national authorities and banks.

The Single Supervisory Mechanism will need to have an ambitious scope as far as the number of banks covered is concerned. As we have seen in recent years, even small banks can be systemic and cause financial turmoil (Northern Rock, Anglo Irish, Bankia). Our approach therefore envisages an ambitious mechanism with a relatively broad coverage, which will oversee all banks in the euro area, with the ECB at the heart of the system.

The ECB will have to be entrusted with the prime responsibility and with key supervisory tasks to ensure efficient and high-quality supervision. National supervisors, who have accumulated experience and developed expertise in prudential supervision, will continue to play an important role in this system.

We will have to ensure that any risk of conflicts of interest in the decision making bodies of the ECB is excluded, in particular by ensuring the separation of supervisory functions from those related to the implementation of monetary policy.

Finally, appropriate mechanisms of democratic accountability must be constructed: for supervisory duties, the responsibility of the ECB must be strengthened, compared to the independence it enjoys as an institution responsible for monetary policy.

The Commission has already proposed legislation that will reinforce the current national systems for deposit guarantee schemes and bank resolution and recovery, and strengthen the capital requirements for banks. These proposals, which will apply to all the 27 Member States, are crucially important, and they should be adopted by the Council and European Parliament as soon as possible.

At the second stage, we must make decisive progress to build a Common Deposit Guarantee Scheme for the protection of depositors, as well as for a single European recovery and resolution framework.

When presenting the legislative proposals for setting up a Single Supervisory Mechanism, we shall also adopt a Communication which sketches out the roadmap towards a fully-fledged banking union.

The very high levels of economic and financial interdependence, particularly in the euro area, call for a qualitative move towards a fiscal union, in order to ensure the smoothest possible functioning of the EMU for the benefit of European citizens.

A fiscal union needs to ensure sound budgetary policies at the national and European levels, so as to contribute to sustainable growth and ensure macro-economic stability. It should include effective mechanisms to prevent and correct unsustainable fiscal developments in the Member States. It should also include tools to deal with asymmetric shocks and to help prevent contagion in the euro area.

This could in turn involve coordinated or even common – but limited – debt issuance, as long as the risk sharing is accompanied with commensurate steps towards common decision-making on budgets that safeguard against moral hazard and free-riding.

While we need to be ready for bold steps towards integrated financial, fiscal and economic policies, we should not raise the bar too high – at least in the short term – since this would risk, paradoxically, playing into the hands of those seeking to portray a truly integrated EMU as an impossibility.

Therefore, while we reflect and work on the design of a future EMU, we must at the same time make full use of the existing instruments and toolbox and of the governance framework currently in place, improving them where there is room for improvement.

We can still enhance the governance framework, in particular by completing work on the two-pack. We must introduce new dynamism into the ongoing trilogues to allow us to swiftly reach an agreement that respects the original aim of proposals, notably improving budgetary surveillance and coordination in the euro area.

This includes a timely presentation of Member States' draft budgetary plans ahead of parliamentary adoption and a more efficient framework to ensure the correction of excessive deficits.

Further steps towards integration can be pursued in the longer-run, including stronger fiscal integration, possibly coupled with common debt instruments. But it should be clear that such steps would involve significant further pooling of decision-making and would likely require Treaty changes and corresponding steps to ensure political legitimacy.

The Economic Dialogue introduced by the Six-Pack is a new inter-institutional instrument ensuring a forum for democratic accountability in the area of economic policy coordination. A potentially far-reaching aspect of the six-pack are the innovative provisions which allow the Parliament to conduct Economic Dialogues with individual Member States, in particular when they are in breach EU rules. These provisions allow for a national government to be held to account in public at the European level for any failure to respect their European obligations.

But the Economic Dialogue with the European Parliament is probably not enough to respond to broader questions about the democratic accountability of "Brussels" towards European citizens. There also needs to be more and closer co-operation between national parliaments and the European Parliament.

In this context, let me also draw your attention to one of the important proposals within the two-pack. It is the possibility for the Commission to be invited by national parliaments to explain its position on national budgets. Future legislation (for example on ex ante economic policy co-ordination) could include similar provisions.

Full speech

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