09 June 2016

VP Dombrovskis on the EMU: restarting convergence and strengthening resilience

European Commission Vice President gave a keynote speech at the Brussels Economic Forum in which he outlined the work of the Commission to get the EU and the euro area back on the track of economic growth and job creation.

A lot has been done to close the gaps in the EMU framework and to make it more resilient. In the response to the crisis, we have introduced a number of measures:

- the European Semester, an upgraded governance framework to better coordinate fiscal and macroeconomic policies among Member States;

- a Macroeconomic Imbalances Procedure to detect and address economic imbalances early on;

- more sophisticated fiscal rules, the six-pack, the two-pack regulations and the Fiscal Compact;

- a financial backstop - the European Stability Mechanism - to provide support to Member States in difficulty, against necessary policy conditionality;

- and finally, we have created a Banking Union to weaken the bank-sovereign loop and to ensure financial stability. We have established bail-in as a fundamental principle of bank resolution, to make sure taxpayers are not first in line to pay for the banking sector's mistakes.

 

These efforts have also been supported by the European Central Bank's monetary policy. Mario Draghi's famous 'whatever it takes' helped to calm down financial markets during the Eurozone crisis.

This referred to Outright Monetary Transactions, and in the meantime, the European Court of Justice has confirmed that they are within the mandate of the ECB. The ECB is also helping the economic recovery with its accommodative monetary policy, not least with quantitative easing.

Today, the EMU is already much more resilient than it was just a few years ago. [...]

So, we have done the necessary crisis management. But the work is not finished. We need to move further to complete the Economic and Monetary Union.

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In the longer term completing the EMU may require new tools and institutions. But the first question is not one of revolutionary new steps, but of showing that what we have already agreed is working.

'Deepening by doing' - as the Five Presidents' Report describes the first stage - means fully implementing decisions taken. Advancing further within the existing legislative framework and streamlining its application where necessary. Only consistent implementation of the decisions already taken can provide us with the necessary credibilityto advance in Stage 2.

The Commission has set out how to do so with proposals put on the table last autumn.

To strengthen economic governance, we are revamping the European Semester. We now issue fewer and more focused Country-Specific Recommendations. The euro area recommendations are now issued before the national ones, so that governments can take them into consideration when designing their national reform programmes. We pay more attention to the aggregate fiscal stance for the euro area. And we have reinforced the social dimension of the European Semester.

We have launched a more systematic benchmarking of structural policies. In essence, this means coming to a common understanding of what a desirable policy set-up should be in key policy areas. These benchmarks would then provide a basis for CSRs. All this work is done in closer cooperation with national authorities and social partners than in the past.

We are providing more concrete support to reforms from the European level. With macroeconomic conditionality, EU funds are now more targeted at structural reforms.

The Commission has also set up a Structural Reform Support Service to provide technical assistance at the request of Member States.

We are setting up the advisory European Fiscal Board and we have recommended National Competitiveness Boards,to foster a better common understanding of what drives competitiveness and productivity, and how these can be bolstered across the euro area.

On the external representation of the euro, we have tabled a legislative proposal and drew up a roadmap towards allowing euro area Member States to speak with one voice, notably in the IMF.

Work on the Capital Markets Union is also well under way, so that EU companies can gain access to more diverse sources of financing and reduce their reliance on bank financing only.

The Commission has set out what is needed to complete Banking Union, based on thorough implementation of the two pillars already in place – supervision and resolution, and the agreed common backstop.

We have tabled a proposal for a European Deposit Insurance Scheme, the missing pillar of the Banking Union.

The Commission will make the necessary proposals to further reduce risks in the financial sector. Let me reiterate once again that risk-reduction and risk-sharing go hand in hand.

The European Commission is closely following and facilitating the discussions at the European Parliament and the Council, related to our proposals for the Stage 1 of the Five Presidents' Report. And we hope for real progress already in the nearest future.

As a next step, it is essential that the June ECOFIN agrees on a roadmap to complete Banking Union.

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As the work on Stage 1 continues, the preparations for Stage 2 have started as well.

There is broad interest in EMU deepening: public consultation events across Europe continue to raise awareness, and clarify questions on what direction we are heading. [...]

Two issues seem most relevant to me at this point:

Firstly, how to restart the convergence process within the euro area.

If the convergence benchmarks are to be made more binding, how do we define the most important, and the most realistic benchmarks? In which policy areas? The Five Presidents' Report mentions some of them - labour markets, competitiveness, businessenvironment and public administrations, as well as certain aspects of tax policy. [...]

Secondly, there might be exceptional circumstances – large asymmetric shocks – when national stabilisation is unable to smoothen the economic cycle, even if a country has been abiding by the rules. [...]

There could be a financial mechanism providing loans, under favourable conditions, to support additional investment in countries facing economic shocks. [...]

Full speech

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