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The first component is stabilising the euro area, as without a stable foundation there can be no growth. The second component is strengthening the euro area – by ensuring sustainable economic policies in all member countries, by increasing the competitiveness of our economies and by completing the institutional architecture of economic and monetary union (EMU).
My main message is that we have made significant progress on the first step, stabilising the euro area. But there is still work to do to transform this achievement into higher growth and employment. Strengthening the euro area through sustainable policies, higher competitiveness and stronger common institutions is therefore our priority for today...
The need to strengthen the institutional architecture of EMU
There are several areas in which we can make progress, as we outlined in last year’s “Four Presidents’ Report”. For now, I see the priorities as Banking Union and economic union.
Banking Union serves a range of aims, but in the current circumstances restarting lending to the real economy is the key priority. One barrier to bank lending at present is lack of transparency over bank balance sheets. Having a single European supervisor will help address this, as we plan to conduct a comprehensive balance sheet assessment of banks we directly supervise.
Another barrier to bank lending is low investor confidence, which is in part created by different rules for banks across jurisdictions and a lack of comparability. The future European supervisor will also help here, not least by leading to harmonised treatment across the banks it supervises – for example, of loan classification, forbearance and provisioning.
Beyond that, Banking Union should help speed up the repair of banks – that is if, as I hope, we end up with a strong single resolution mechanism. We need a mechanism that allows non-viable banks to be wound down without financial stability risks, as we see in the US. This tends to support a quicker recovery from banking crises and more stable credit provision to firms and households.
Economic union is also intended to help the real economy, as it aims to help countries reorient their economic policies to benefit more from sharing a single currency. We need to ensure that countries can maintain sustainable growth and high levels of employment without developing internal and external imbalances. This is a prerequisite for the stability of the euro area as a whole.
One way to achieve this would be to develop better ways of measuring economic performance – for example, more structural indicators of competitiveness. Another possibility would be to encourage structural reforms that make economies function more efficiently, and in a way that is more inclusive and benefits all groups in society. Here an idea currently being contemplated is so-called “reform contracts”. Such concepts are still at a relatively early stage, and I look forward to them being developed further in the next few months.