BoF/Noyer: Euro area's situation – analysis, challenges and solutions
11 June 2012
Mr Noyer, Governor of the Bank of France, said the challenge for most individual euro area countries is obviously to achieve strong fiscal consolidation while ensuring long-term growth. In his view, the two goals can be complementary.
The first three months of 2012 had shown a few signs of improvement, in particular thanks to the Eurosystem initiatives and positive political impulses: pressure on sovereign debt eased slightly, and bank financing and money markets recovered somewhat. But since April, sovereign debt and banking systems have come under renewed pressure. The two main driving factors behind this deterioration are the fiscal problems and difficulties in the banking sector in Spain – but the plan adopted over the weekend should respond effectively – and, above all, the major political uncertainty in Greece.
Obviously, a good and coherent functioning of the banking sector is absolutely vital for an overall solution to the euro area crisis. This conviction is based on two fundamental observations:
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Appropriate financing is essential for our economies to achieve strong and sustainable growth. In Europe, the banking system is the main source of financing, and hence its strength is of crucial importance. However, financial markets naturally also play a key role and they should focus on serving the economy.
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Secondly, financial stability is critical, not just for creating the right conditions for the appropriate financing of the economy. It is also an extremely valuable asset in fostering confidence, which has been severely lacking in recent years and is another key condition for growth. It is also a vital condition for the effectiveness of monetary policy, as it allows the normal functioning of transmission mechanisms. In addition, given the feedback loop between banks and sovereigns and the potential impact of a financial crisis on a country’s fiscal position, financial stability makes a major contribution to fiscal stability.
The euro area needs a new and concrete leap towards stronger financial integration. It is true that we have made enormous progress for more regulation and created new tools, but the different episodes of the crisis have demonstrated that a monetary union can be stronger if it relies on a financial system whose health is not ultimately dependent on national mechanisms:
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the homogeneous health of the financial system is key for the proper transmission of a single euro area monetary policy;
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as long as the euro area’s financial health is vulnerable to problems in one country, negative feedback loops between sovereign and banking risks can materialise – this is precisely what happened in the euro area;
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in a monetary union, capital is free to move very quickly from one country to another, thereby augmenting the potential incidence of “bank runs” if no supranational deposit guarantee mechanism is in place.
Therefore, we have to build a truly federal authority in the eurozone, a structure combining the US FDIC’s functions with the ones of the US Federal Reserve System would be a major advantage for the future of the euro area. It should have three main powers:
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banking supervision (possibly the same kind of structure as the Eurosystem with one “head” and decentralised implementation);
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deposit guarantee, with massive firepower, provided that it could collect a tax on every euro area bank and could borrow on the markets with a supranational guarantee;
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banking resolution (crisis management).
Full speech
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