Speech by Eurogroup President Jeroen Dijsselbloem at the Tatra Summit in Bratislava, Slovakia, 4 November 2015
Eurogroup President Spokesperson
Ladies and gentlemen,
Earlier this year we presented the so-called Five Presidents' Report on the future governance of the European Monetary Union. It outlines the ambition to strengthen Europe's Economic and Monetary Union and to prepare it and its member states for the global challenges ahead.
The 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. Since the publication of the report the Commission has come forward with proposals that we will discuss in the coming time, to further improve our economic governance in the short term. In this speech I would like to focus on the medium- and long-term.
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. On all of these issues, we have made major progress since 2008. Not just in our legal frameworks, but also in terms of economic reality: our budgets, our economies and our banks are in much better shape.
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.
In the current debate the opposite approach is often taken. Fiscal capacity is an example. It is embraced by many, but for a variety of different reasons. When speaking of the need for a fiscal capacity, or a eurozone budget, some see it as an instrument to boost public investments. Others see it as a carrot to encourage structural reforms. More often a fiscal capacity is seen as a stabilisation tool to allow for anti-cyclical fiscal policy in different countries. And finally a fiscal capacity is sometimes advocated by those who see a need for further risk sharing within a monetary union.
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. Yet, looking back there have been very few asymmetric macro-economic shocks in the eurozone. Business cycles have proven to be surprisingly symmetrical. Admittedly, over the last years there have been differences in economic performance during the crisis, but they seem to have been caused by asymmetric policy errors. For example the political neglect of the booming housing market in my own country caused first the boom and then the bust.
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 other words: risks were pushed back to where they belong, to the private side, to the investors' side where they will be priced appropriately. But more needs to be done to strengthen the resilience of our banking system.
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. A more diversified cross-border capital market would mean that equity-investors also carry part of the burden. Europe's equity markets are less than half the size of the American ones, so you can only guess how much more vulnerable we were. More specifically, in the US 60% of the shocks are being absorbed by private market parties. This shows the importance of more integrated financial systems that help sharing risks and absorb the economic shocks we experience.
Of course the private solutions as I've described, will never be the sole answer. Even with a completed Banking Union, with full implementation of the bail-in rules, and a privately financed resolution fund, we still need a common backstop. Even with a completed capital markets union there is always a risk of funds being invested in unproductive sectors. 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 is a big difference between a political Commission and a politicised Commission. Let me explain. The Commission as in the college of commissioners, is a political body. But I feel but the assessment of the national draft budgetary plans should be done in a technical way and not in a politicised way. For that reason 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.
Let me make a few final remarks. Today's divergence creates political and economic fragility for the Union as a whole and moreover challenges its legitimacy. We must correct this divergence and embark on a new process of convergence, growing towards each other in an upward movement. Convergence does not mean replacing national systems with a full-fledged EU system. This would be politically and economically disruptive. Nor does convergence mean moving to the lowest common denominator. It means converging towards best standards. It means we structurally reform our economies to improve productivity and achieve sustainable long-term growth. In order to achieve full employment and maintain the European social model. Finally, I feel we cannot continue down a path of integration through the back door. We have to do it through the front door.
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.
And that, ladies and gentlemen, is the sine qua non of the euro.