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The integration brought about by the economic and monetary union was by construction an asymmetric one: This was supposed to be in keeping with the principle of liability, as spelled out in the no-bail-out clause, which sought to complement the coordination rules by fostering market discipline with regard to fiscal policy. And it was in keeping with the primacy of monetary stability by virtue of an independent European System of Central Banks and the prohibition of monetary financing. Besides being designed to promote stability, the euro promised to foster prosperity and convergence as well.
We now know that things did not quite work out as expected. I wish to argue we both need to shift economic policies to the European level to make monetary union viable as well as amend the existing framework.
In terms of the implicit guarantee given for sovereigns, a genuine fiscal union would be a path towards establishing a framework which balances liability and control. If control and intervention rights would be shifted to the European level, a greater mutualisation of liabilities would become feasible – and may be justified. But it seems to me that giving up national sovereignty in fiscal matters does not enjoy a majority in Europe at this juncture – neither among politicians nor among the general public in the Member States. So for me, the only feasible way forward is to strengthen the framework laid down in the European Treaties.
The new Stability and Growth Pact is a step in the right direction. And we also need to make sure that in a system of national control and national responsibility, sovereign default is possible without bringing down the financial system. To achieve this, we have to sever the excessively close links between banks and sovereigns. To counteract excessive investment in sovereign bonds, we need to change the capital rules for these bonds to make sure they are adequately risk-weighted; and we need limits for banks’ exposures to sovereigns, as is already the case for private creditors.
Removing the implicit guarantee for banks is another task at hand. To make that happen, we have to ensure the resolvability of banks. And to further strengthen market discipline, the establishment of a single supervisory mechanism for systemically important banks as well as a single resolution mechanism will be an important step forward, not just for financial stability, but for sustainable growth as well. Better still would be if banks didn’t reach the point of having to be wound down in the first place. In this regard, higher capital requirements are a big part of the solution – the single supervisory mechanism is another.
Monetary policy has already done a lot to absorb the economic consequences of the crisis, but it cannot solve the crisis. This is the consensus of the Governing Council. The best contribution a central bank can make to a lasting resolution of the crisis is to fulfil its mandate: that of maintaining price stability.