17 December 2012

ECB/Draghi: Introductory statement at ECON Committee hearing

Economic and monetary developments

The medium-term outlook for economic activity remains challenging. Economic activity contracted for a second consecutive quarter in the third quarter of 2012, and indicators for the fourth quarter signal further weakness, although some recent survey indicators have stabilised at low levels and financial market sentiment has improved further.

We expect economic weakness to extend into next year with a very gradual recovery in the second half of the year.

Our monetary analysis paints a picture consistent with price stability. Looking at developments over several months, the underlying pace of monetary expansion, when accounting for special factors, remains subdued.

Monetary policy and financial supervision

In recent years, many central banks have, for good reasons, assumed supervisory roles. This suggests that the relationship between monetary policy and financial supervision is particularly important in times of crisis.

The ECB will establish clear guiding principles and internal operating practices to ensure effective separation of monetary policy and financial supervision. Let me briefly elaborate.

First, the ECB’s involvement in financial supervision has no bearing whatsoever on our primary objective of price stability. It bears neither on the objective itself, which is statutory, nor on its quantified expression of inflation rates below, but close to, 2 per cent.

Second, a supervisory board will form the centre of gravity for the conduct of financial supervision. It may encompass a geographical entity that is somewhat wider than the euro area if, as we hope, several countries that are not currently euro area Member States decide to join the SSM.

Third, separation between monetary policy and financial supervision will in particular take the form of independent analysis and prescription for the use of policy tools for each of the two functions. This will rely on strong governance.

We will establish appropriate internal procedures that ensure clear functional separation. Here we will follow international best practice.

While separation of the two functions is essential, it is an established fact that stronger supervision facilitates the conduct of monetary policy. Let me give you just two examples.

First, in the absence of financial stability, standard monetary policy tools – namely, changes in the short-term interest rate – lose some of their potency. Effective supervision that contributes to a stable financial system can only benefit the smooth transmission of monetary policy.

Second, effective financial supervision can counteract excessive leverage and exuberant credit expansions, which can generate inflationary pressure over the longer term. Thus, in mitigating the build-up of macro-economic imbalances, effective supervision can foster a stable macroeconomic environment with stable prices.

Monetary policy will stay credibly orientated towards price stability. In so doing, it secures the trust of markets and the public in the stable purchasing power of a currency. This stabilises market expectations, lowers volatility and creates an environment for stable financial markets.

We have begun internal reflections on all these issues, together with the national central banks, and we stand ready to launch the formal preparations as soon as the legal framework has been adopted.

A genuine economic and monetary union

From an ECB perspective, I see two main priorities for 2013. First, we should improve the functioning of economic union.  Excessive imbalances within the euro area have destabilised EMU. This must not be allowed to happen again. 

What can be done at the European level to provide even more support for this process? The proposed ‘reform contracts’ between euro area Member States and EU institutions are a promising avenue. Combined with a carefully designed framework of targeted and temporary financial support, they should contribute to fostering structural reforms and thereby strengthening competitiveness.

Ideally, the reform contracts should focus on countries with the largest competitiveness challenges. They should identify the structural bottlenecks to improving competitiveness and target the reforms in a way that will remove those bottlenecks. This would establish a clear link between reforms and restoring competitiveness, which is essential for growth and job creation.

Smooth functioning of product and labour markets is a prerequisite for growth and job creation in EMU. I therefore welcome the announcement that next year the European Commission will undertake a systematic review of product and labour markets. For euro area countries the review should allow to assess whether these markets are fully compatible with participation in EMU. Here, product and labour markets must provide for enhanced adjustment capacity to adapt to a changing global economic environment and ensure sustained high levels of employment.

The second priority for 2013 from the ECB’s perspective is the completion of financial union with the establishment of a single resolution mechanism. The aim of resolution is to deal with non-viable banks through measures that include their orderly winding down and closure while preserving financial stability. Such a mechanism will make it possible for banks to fail in an orderly manner.

Full speech

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