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Fostering structural resilience and sustainable economic convergence in the euro area
Looking at the need for structural reforms more broadly, more needs to be done in the euro area as a whole. The past 15 to 20 years show that euro area countries with sound economic structures from the outset have achieved much higher long-term real growth and are more resilient. Countries which adopted ambitious reforms during the crisis, such as Latvia, recovered faster than others, with these improved economic conditions leading to higher employment rates2 - and the full effects are still materialising.
Nevertheless, over the past five years structural reform implementation in the euro area has, overall, been sluggish at best. Very few reforms identified in the European Semester have been substantially implemented. Reversing this trend and putting our economy on a higher convergence trajectory is thus a priority.
In parallel, national policymakers should make it a priority to build up fiscal buffers to ensure policy space for future downturns. This is particularly important in countries where government debt is high and for which adherence to the Stability and Growth Pact is critical for safeguarding sound fiscal positions.
National authorities should therefore be the first ones to step up their efforts. Nevertheless, European policies can be a significant catalyst and provide a strong engine for both growth and employment, in various ways.
First, there is scope for a better use of the EU's budget. The discussions on the 2021-27 multiannual financial framework offer an opportunity to enhance its role in addressing Europe's structural challenges, and I welcome the commitment made by leaders at the Euro Summit to pursue this avenue.
Second, the Single Market as an engine for convergence should be used to its fullest potential. This means expanding its reach into new areas, especially those relevant for innovation, such as the digital economy. This is an essential driver of economic progress, benefiting consumers, businesses and the economy as a whole, and will also provide a healthy ecosystem for financial services.
It also means increasing the depth of the Single Market. In the area of financial services, the completion of the banking union and the capital markets union agenda offer an opportunity to do this, and would also provide the cross-border private risk-sharing mechanisms required to underpin the resilience of our economy.
This is because deeper and more efficient bond and equity markets in Europe would allow economies of scale to be achieved and capital to be allocated to its most productive uses at the European level, in line with the Single Market objectives. In countries such as Latvia, this is particularly relevant because capital markets are less developed and intermediation remains largely bank-based, which results in fewer options for financing business start-ups and expansion.3
Creating a genuine banking union where banks operate across borders and diversify their sources of income would also enhance cross-border private risk sharing, with the result that banks would be able to continue lending to the real economy even when faced with localised shocks.
For these benefits to materialise, we need to pursue a more ambitious long-term approach to the capital markets union agenda. At the local level, decisive action is needed to develop the scale and depth of capital markets in countries with large catching-up potential, such as Latvia.4 At the EU level, measures need to be prioritised in areas which will make a real difference to the development of capital markets, notably measures to address barriers in national insolvency frameworks and in taxation.
We also need to be ambitious in our endeavours to complete the banking union. The statement of the Euro Summit adopted in December paves the way for operationalising the backstop to the Single Resolution Fund, which will create market confidence that bank resolutions will take place in an orderly fashion. There is also recognition that it is time to start political discussions on the missing third pillar of the banking union - a European deposit insurance scheme.
This does not mean that we do not need to make further progress in risk reduction. Substantial risk reduction has been achieved, and the process is ongoing and should continue. The European regulatory framework is already making Europe's banks more resilient and gives authorities the tools to act when risks build up. Banks now hold more and better-quality capital,5 and have improved their liquidity positions and leverage. Progress in tackling legacy issues such as high levels of non-performing loans, which have fallen by 30% since 2014, and the framework for resolution, including the implementation of the minimum requirement for own funds and eligible liabilities, have also helped to increase buffers and reduce risk and thereby the scope for risk sharing.
The crisis demonstrated how important it is for banks to build up capital buffers in good times. In my view, the current economic and financial conditions call for more action by macroprudential authorities to enhance the resilience of the banking sector and ensure the system has buffers in place that can be released in times of stress. In an increasing number of countries, authorities are considering activating a countercyclical buffer, as it hedges against economic and financial shocks, further contributing to risk reduction. [...]