First, monetary policy has to remain consistently supportive of the baseline outlook and mitigate the risks that surround it. Our price stability mandate is sufficiently precise to keep us concentrated on that mission. But preserving monetary accommodation is a necessary but not sufficient condition for the recovery to take hold.
A second essential ingredient is that countries continue the adjustment of their domestic policies in a way that removes structural impediments to their economic potential and fosters long-term fiscal sustainability. Monetary accommodation can accompany and facilitate such regime shift in economic policy. But we know it can never replace it.
Third and equally important, Europe has to continue the reform process in its banking sector. Sound finance is part and parcel of a dynamic economy and banks remain a major conduit of finance in the euro area. Hence, we must establish conditions that align incentives of individual financial institutions with those of society.
(...)
Monetary policy
Going forward, we will carefully assess developments in money markets and liquidity conditions. We have to ensure that interest rate expectations remain firmly anchored around a path that does not add to downside risks to the recovery. Thus, our monetary policy stance will continue to be geared towards maintaining the degree of accommodation warranted by the outlook for price stability and promoting stable money market conditions. It thereby provides support to a gradual recovery in economic activity.
Fiscal consolidation and competitiveness
In short, there is progress towards more solid economic fundamentals in the euro area. But maintaining the current momentum of reform is essential for ensuring stability in the euro area.
Bank balance sheets and Banking Union
Looking forward, two objectives need to be addressed: First, we need to create full transparency about the risks on banks’ balance sheets. And, second, we need to align investors’ incentives with those of society.
A comprehensive balance sheet assessment will be a crucial preparatory step before we begin our new supervisory task in autumn 2014. This will serve to strengthen transparency and to mitigate the risk of the possible emergence of problem banks in the early days of operation of the new supervisory mechanism. This balance sheet assessment, to be conducted by the ECB together with national supervisors and an independent third party, will consist of a supervisory risk assessment and a thorough asset quality review that in turn will be an input for a stress test to be jointly carried out with the European Banking Authority (EBA). The three elements combined will ensure a comprehensive assessment, identifying remaining risks on banks’ balance sheets.
To strengthen incentives, the institutional architecture will be augmented by the single resolution mechanism. As a first step to overcoming the existing problems of incentive incompatibility, harmonised rules and procedures for bank recovery and resolution are currently being developed at European level. These harmonised frameworks should be implemented at national level as soon as possible.
But to ensure a fully consistent and effective application of these rules, their implementation should be placed within the remit of an independent authority that reinforces the new supervisory framework at a European level.
To that effect, the EU’s institutional architecture should be augmented by a single resolution mechanism that executes bank resolution in a timely and impartial manner and formulates its decisions from a clear, encompassing European perspective.
By enhancing transparency and incentive compatibility, the combination of the single supervisory mechanism and the single resolution mechanism will help Europe return to a situation in which investment decisions will be based on business prospects, not on geographical location.
Conclusions
The recovery remains in its infancy. Given the prolonged build-up of macro-economic imbalances in the past, we have to be prepared for a protracted and anaemic process in the future.
Yet we should also not exaggerate the euro area’s challenges. While the unemployment rate has increased more in the euro area than in the US during the crisis, the employment rate in the US has fallen further than in the euro area, which makes the figures difficult to compare.
Moreover, the euro area has a strategy to return to sustainable growth and employment, and that strategy is being executed. What is essential is that all policy-makers in the euro area play their part and stay the course. The rewards that will result from the reform of our economic institutions cannot be overestimated.
Full speech
Speaking at the 28th International Monetary and Financial Committee (IMFC) in Washington on 12th October, Draghi touched upon progress made to date in establishing European Banking Union. He welcomed the approval of the single supervisory mechanism by the European Parliament on 12 September and looked forward to its “urgent adoption” by the EU Council later this month, with a view to the ECB adopting its new supervisory role by November 2014. In addition, Draghi supported the establishment of the single resolution mechanism, “a necessary complement to the SSM”, by the end of 2014.
Full speech
See other IMFC statements from:
© ECB - European Central Bank
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article