16 October 2015

ECB's Cœuré: Towards a political convergence process in the euro area

Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the Interparliamentary Conference “Towards a Progressive Europe”

The effectiveness of the ECB’s action rests on the "M" in the EMU being kept free from political interference. But for this to be secured in a lasting way, we need to further develop the "E", i.e. the economic union.

In the past decade, intermediate solutions to save the euro area were found, but left the EMU still vulnerable to future crises. Therefore, we need to define a new convergence process, involving converging economic structures and more integrated markets. This should be complemented by fully legitimate institutions with the right instruments to intervene if the consensus is not respected.

This new convergence process will lead to higher resilience against economic shocks on a national level and European level, via internal and euro-wide adjustment mechanisms. And it is a prerequisite before discussing a layer of fiscal stabilisation at the European level, which would protect monetary policy from bearing too much of the stabilisation burden.

But such a new convergence process cannot be a technical exercise. For convergence to be lasting and to secure the buy-in of citizens and Member States, such a process needs to be political in nature. This requires a revived political narrative for euro area integration, and a coherent European social contract that brings out the best in each national social contract. [...]

Towards a political and economic convergence process

[...]

Yet, in order to foster not only economic convergence and, moreover, go beyond this to create political convergence and lasting buy-in through a new political narrative, requires a process that is both economic and political.

What would be the key features of the economic dimension of the process?

In my view, a small number of simple, but important conditions would need to be met, namely a) consensus on designating economic policies as a shared competence; b) agreement on which policy areas should be subject to convergence; and c) a mechanism ensuring that convergence will continue beyond the end of the initial process.

If these conditions are fulfilled, a “convergence process 2.0” would not only be an effective instrument for preventing and managing imbalances and macroeconomic risks. In my view, it would also be a precondition for adding a layer of fiscal stabilisation at the European level. Sufficient convergence in terms of resilience could help Member States to deal with asymmetric shocks without leading to permanent transfers in one direction. [...]

But we should not be fooled: common fiscal policies will be neither economically desirable nor politically feasible without a successful economic convergence process. [...]

Indeed, this is why a forceful and thorough implementation of the current framework – the Fiscal Compact, Stability and Growth Pact, Macroeconomic Imbalance Procedure and Country Specific Recommendations – is indispensable for future progression. [...]

We need a process that ensures the buy-in of citizens, governments and parliaments, that fosters a broad debate concerning our common understanding of what economic policies in a monetary union should look like, and that, for the most part, works based on consent to a common framework and provides fully legitimate institutions with the right instruments to intervene if the consensus is not respected.

This kind of political convergence process represents an opportunity: it could lead us to the political narrative I mentioned before. [...]

If we were to commit to such a process, there would be a political cost to pay upfront as this would mean admitting to citizens that national parliaments alone cannot address all future challenges on their own anymore. But let us acknowledge that there is no such thing as a free lunch. This political cost is precisely the visible measure of collective commitment to the single currency project, which is necessary to ensure the economic and political resilience of EMU in the future. [...]

Full speech

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