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[...] The [Five Presidents' Report] presents crucial steps to make the Union more resilient in the short run by boosting the convergence process. It also presents more visionary elements for the medium and longer term. More specifically, the report outlines the need for renewed ambition to achieve convergence as this is key for lifting the growth potential and the competitiveness of the euro area.
Growth is not an end in itself. But it is crucial if we want a thriving euro area in a globalised world and if we want to keep and maintain Europe's unique and inclusive social-economic model. [...]
The debate on what is needed to complete the architecture of the Monetary Union has been going around in circles. Circles around a few symbolic, important instruments, such as contractual arrangements and a fiscal capacity, which function as landmarks on the road to a complete Economic Union. Before examining these instruments, I think we first need to agree on our analysis of the problems we face. We need to consider the political context, which is challenging. And only then can we design the way forward.
First of all let me be clear: of course, when you are in a Monetary Union you must commit to sensible fiscal policy. That is why we have the Stability and Growth Pact. And of course, major risks in your macro-economic policies have to be addressed before they become the next crisis. Hence we have a macro economical imbalances procedure. And, given the major potential risks the financial sector poses to public finances and to our economies, we have to jointly address weaknesses in the regulations and in the supervision of our financial sector. [...]
As these examples show, there can be no dispute about the need to share sovereignty in a Monetary Union. The big questions for our common future are: where do we need to share sovereignty, how much do we need to share and where can we go our own way? To answer these we need to focus on the problem first and not jump to the possible solutions. [...]
So that's at least four different arguments for the same instrument. But let's define what we are trying to tackle here. I believe for the monetary union to be stable, it needs to strengthen its shock absorption capacity. The question is how to achieve this. What do we need to do to become more resilient and flexible? How does a fiscal capacity fit into this?
The need for a common European stabilization tool for the Monetary Union would derive from asymmetric shocks. [...]
At the same time financial cycles are more divergent and have caused greater risks at the eurozone-level. Knowing this, we need to ask ourselves; what is the best way forward to strengthen our risk-absorbing capacity and assure build-in stabilisation tools? I see two ways.
We need to complete our Banking Union and we need to establish a real Capital Markets Union. There is a clear trade-off between a banking union and a capital markets union on the one hand and the need for a fiscal capacity on the other. I strongly believe shock absorption through a strong and well-functioning Banking Union and a Capital Markets Union is preferred over additional budgetary means. I believe strongly in private risk buffering over public risk buffering. Let me explain.
First completing the Banking Union. In order to break the vicious circle between banks and sovereigns, we established a Banking Union, and did so at unprecedented speed. The key element in building the Banking Union was the paradigm-shift from bail-out to bail-in. From public to private risks. This is a fundamental shift in our approach. No longer is the public budget (national nor European) the main backstop, but the banks and their investors must be able to absorb their own losses. [...]
In practice, this means, establishing a solid leverage ratio, dealing with the approximately 150 national options and discretions that are still left, working towards a real single rulebook, reducing sovereign risks and applying the bail-in rules in full. At the same time we need to deal with the asset side of bank balance sheets - by tackling the high level of non-performing loans through the insolvency and foreclosure frameworks. Completing the Banking Union, by agreeing on a common backstop and by launching a European deposit guarantee system is about sharing risks. I believe it's even more important to diminish risks. Only then, will we have a sustainable Banking Union which absorbs shocks throughout the eurozone.
Second, we need stronger and much more integrated capital markets, in other words a real Capital Markets Union. Well-functioning capital markets will strengthen cross-border risk sharing through the deeper integration of bond and equity markets. It opens up a wider range of funding sources for our economy and it is therefore a key shock absorber of a kind we currently lack.
In an economy largely financed by loans from the (domestic) banking system, as currently is the case in the eurozone, banks take a major hit in the event of an economic downturn. [...]
Of course the private solutions as I've described, will never be the sole answer. [...] It is therefore of utmost importance that our public budgets have the capacity to deal with economic shocks. Come what may, it remains our duty to ensure our public budgets contain a buffer capacity. This requires using the good times to deleverage, to bring down our public deficits when we can. And in the event of a shock - this buffer will allow us to use sovereign debt as an extra insurance against economic setbacks.
Safeguarding this buffer - and keeping our public finances on a sustainable footing calls for transparent compliance with and enforcement of the budgetary rules: the Stability and Growth Pact is our anchor of confidence as Mario Draghi always says and we need to adhere to the rules. The Commission's role is crucial here. The Commission has the instrument to make sure the fiscal rules are applied and if necessary it must use it. [...] there could be merits in having a big European sister of the national fiscal councils, placed outside the Commission to provide independent assessments of the national draft budgets, on the basis of which the Commission gives its (political) opinion. I think this is the right approach.
Perhaps over and above all these steps, a completed Banking Union, a Capital Markets Union and national public budgets with fiscal space for a rainy day, there could be additional merits in a fiscal capacity for the eurozone. But it would only be additional and have less impact than the other solutions I have highlighted. And it would first require a strong convergence of both our economies and our policies, for such a fiscal capacity to be effective.
I would also recall that transfers within the European Union already take place. That is nothing new. Some of our member states already receive up to 3-4% of their GDP from the EU budget. The main issue is that it is spent well and efficiently. [...]
Our key problem is a loss of public confidence in the euro and in how we are moving forward. People feel that the austerity and reform agenda's entail a loss of social rights. This is the key concern. Our reform effort has to serve the purpose of improving and sustaining our unique European social-economic model. And as our fiscal and economic policy is so intertwined with the future of our social model, strong involvement by national parliaments will remain vital for democratic legitimacy. Only if we can prove that making progress on key financial and economic issues will help us achieve our social goals, will we regain public support in the euro area.