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What can we make of the adjustments that have taken place in the Member States?
While the euro area has been busy with the reform of its institutional framework, macro-economic imbalances there have diminished considerably. There is reason to assume that the underlying adjustments have largely been structural in nature. Put simply, current account deficits can be reduced through two channels: either domestic demand falls in comparison with external demand (expenditure shifting), or there is a decline in the real effective exchange rate (expenditure switching).
The improvements in the current account balances of the “crisis countries” have indeed been due to a mix of declining domestic demand and real depreciation. Initially in the foreground in these countries was a painful decline in demand. In the meantime, however, the Member States concerned are gradually becoming more competitive again. The improvements in the current accounts of the crisis countries are primarily structural in nature. What is involved is thus not an only temporary drop in domestic demand. That is why, viewed from today’s perspective, we regard the improvements to be sustainable. It is precisely in this area – in the still very tentative economic recovery – that I see the greatest challenge to be faced this year.
What challenges do we still have to face?
Lastingly overcoming the crisis demands a return to sustainable economic growth in Europe. That calls for productive investment. Why is the investment ratio currently so low? Some businesses have reduced their investment because their sales and earnings prospects are muted. The macroeconomic environment is occasionally bleak and some sectors are in the midst of restructuring. Both banks and businesses need to reduce their, in some cases, excessive debt and are shrinking their balance sheets accordingly. That, too, reduces investment activity. Some enterprises simply lack the funds they need for investment. Their possibilities for obtaining financing are inadequate.
Although by far most investment is undertaken by enterprises, the political domain determines the fundamentals that create a favourable climate for investment. Even enterprises that can actually afford to spend money tend to limit their investment in times of political and economic uncertainty. Moreover, public sector investment in key areas such as education and infrastructure add to the attractiveness of an economic location.
Where monetary policy is concerned, this includes the reaffirmation by the Governing Council of its forward guidance, through which the planning security of market participants was increased by indicating that we continue to believe that the ECB’s policy interest rates will remain at their current or a lower level for a longer period of time. With respect to the forthcoming assessment of the balance sheets or stress tests of the most significant banks in the euro area, we intend to publish details of the methodology at the end of this month.
It remains a task of the political domain to further reform the labour markets, to consolidate the public sector budgets in a sustainable manner, to make the judiciary more efficient and to reduce unnecessary bureaucracy. Complex and partially unclear insolvency proceedings may, for instance, have the effect of deterring investment.
The establishment of a Banking Union will contribute to making the banking sector more sound. In preparation of the single supervisory mechanism, we are conducting a comprehensive analysis of the most significant banks in the euro area. In the event of our revealing weaknesses in this exercise, the banks concerned will have to take measures to correct them.
Banks with sound business models, which will be supervised on the basis of harmonised European requirements, should be capable of providing the real economy with loans for productive investment. If that proves to be successful, enterprises will be able to raise a loan from a bank in a neighbouring country, rather than from its home country bank, whenever better terms and conditions offered there. Enterprises would then again be assessed in terms of the creditworthiness, rather than – as is currently the case – on the basis of their location.