The Forum addressed the future of Economic and Monetary Union from three angles: the real economy, the financial sector and the public sector. Rehn looked at each in turn:
The capacity for real economic adjustment, the main theme of the first session, is fundamentally important in a monetary union. This is by no means a new insight, but it was not given sufficient weight when EMU was launched, which now has a very high cost in both economic and social terms... It is evident that Europe has to pursue its structural change by capitalising on the global economy. It is not least the challenge – but even more the opportunities – from trade and global competition that calls for economic reforms and puts pressure on rent-seeking societies. That the trade negotiations with the US can now be opened is of paramount importance from this standpoint.
Moreover, structural change has to be financed. This is why today's second session focuses on the banking sector, on which Europe still depends – too much, one could say. While sovereign risk has receded, the monetary transmission mechanism remains impaired and credit conditions suffer from financial fragmentation.
We are now building the regulatory architecture for Europe’s integrated financial market. In less than a year after the idea was put on the table, the single supervisory mechanism was agreed. Now the focus is on the second pillar, the single resolution mechanism, which is the natural complement to the SSM. It should consist of a single resolution authority and common resolution fund, financed through levies on the sector itself.
The banking union is essential to reverse the process of financial fragmentation in Europe and, thus, to preserve the integrity of the single market in the EU for financial services. The possibility for direct recapitalisation of banks by the European Stability Mechanism is another important feature of the banking union that we are building. I expect the Eurogroup to agree on the principles and rules of a direct recapitalisation instrument for the ESM tomorrow.
The banking union will not be completed overnight. That's why we are taking action to bridge the current weaknesses of the banking sector, for example with the capital increase for the European Investment Bank, which is now effective. But these weaknesses must be addressed directly as well, if the financial sector is to resume its functions and to channel savings to the most productive uses to support adjustment and recovery.
And that's why, on 29 May, we recommended to the euro area that it ensure that the single supervisory mechanism and the European Banking Authority conduct asset quality reviews and stress tests. Rigorous reviews and credible tests, as planned for early next year, are crucial for a successful outcome.
The banking union is not about bailing out bankers, it is about getting a banking system that serves the real economy. In this regard, the Commission is further pursuing the proposals on structural separation made by the high level group chaired by Governor Liikanen. I am very pleased that he could join us today and he will introduce the subject and recommendations in the second panel.
Today's forum will close with a third session on fiscal union. Over the last years, the Stability and Growth Pact has been put on a much sounder foundation. The rules are applied so as to take country-specific differences into account, as we have done on 29 May at the close of the third European Semester, with the focus on structural sustainability of public finances over the medium-term.
With the recent reforms, the options for further fiscal integration have been by and large exhausted under the current Treaty. The Commission's Blueprint towards a genuine Economic and Monetary Union, published last November, sketched out further elements, timelines and conditions. In our view, the essential guiding principle must be that any step towards increased solidarity and mutualisation of economic risk be combined with increased responsibility and fiscal rigour: that is, with further sharing of sovereignty and deeper integration of decision-making within the eurozone.
Against this backdrop, it is not uncommon for the Commission to, on the one hand, face calls for greater economic and fiscal integration but, on the other hand, be criticised for our well-grounded recommendations on fiscal policy and structural reforms. This, once again, teaches us that a deep fiscal union will not emerge overnight. We will lose our citizens unless this is done through a profoundly democratic process – and even the best economic ideas must pass this test before they can be realised.
In other words, the first-best world of economic science is not always at our disposal in the second-best world of political reality. That said, there is no need to fall back into the third-best world of intergovernmentalism. The Community method is and will remain the backbone of any steps to further integration, so that it is both effective and inclusive, also keeping on board the smaller Member States.
Full speech
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