Benoît Cœuré: The single currency: an unfinished agenda

The single currency: an unfinished agenda

Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the ECB Representative Office in Brussels, 3 December 2019

• It is my pleasure to welcome you here tonight to the ECBs representative office in Brussels.
• This office was established in the midst of the euro area sovereign debt crisis in 2011.
• Today, the Brussels office is part and parcel of the ECB.
• It is our eyes and ears on all European matters, thanks to the unwavering commitment and dedication of our staff here on the ground.
• Taking into account our latest decisions, the proportion of female senior managers at the ECB has increased from 9% to 31% since mid-2012 as a result of our diversity strategy.
• The history of this office coincides closely with the history of my term as member of the ECBs Executive Board, which is now coming to an end.
• I joined the ECB in January 2012, just a few months after the office opened.
• It has been a turbulent eight years, and quite possibly one of the most defining periods in Europes post-war history.
• The profitability of banks remains low and, in many cases, below the cost of equity, reflecting risks to business model sustainability.
• [3] And productivity growth, the main component that underpins our living standards and social safety nets, remains low in many Member States.

The first line of defence: integrated and flexible markets

• A consequence of a less business-friendly environment is that business dynamism in Europe is weak.
• Compared with the United States, European countries have, on average, larger shares of static firms and smaller shares of both growing and shrinking firms.
• [5] Low business dynamism feeds and reinforces the misallocation of resources across firms in the euro area.
• [6] Empirical evidence shows that an increasing proportion of capital is concentrated in firms that are less productive.
• [9] Unclogging the innovation channel requires us to improve the ways in which our markets allocate resources, both within and across countries.

Efficient allocation of resources

• Several euro area countries lack an effective framework for early private debt restructuring.
• In Portugal, Greece and Slovakia, for example, it takes more than three years to resolve insolvency.
• [11] Our economic governance framework, the European Semester, has been effective in informing and exchanging views on our economies.
• The macroeconomic imbalance procedure always lacked teeth and none of the 2018 recommendations for euro area countries have been fully implemented.

Completing the Single Market

• Second, we must make better use of the economies of scale offered by the Single Market.
• While the single currency was originally conceived as a complement to the Single Market, lack of progress towards the completion of the Single Market now hampers the deepening of EMU.
• The Single Market was initially established with free cross-border trade in goods in mind.
• [12] As value added and employment shift from the manufacturing to the services sector, the Single Market is increasingly losing traction as an engine of growth.
• Completing the Single Market, in particular for services, is therefore a central pillar in our efforts to boost weak productivity growth.

Launching a capital markets union

• [19] Our capital markets must become deeper and, at the same time, more accessible for start-ups and small and medium-sized firms.
• Achieving truly integrated capital markets is the only way to find the collective response required in the face of enormous global challenges, such as climate change or digitalisation.
• Another reason why a capital markets union is urgently needed is that capital markets help in better sharing economic risks across countries.
• A capital markets union could significantly help to diversify and reduce risk.
• Of course, it would be nave to assume that a capital markets union can be achieved without investing political capital.
• A capital markets union cant function without European-level supervision of systemic intermediaries and infrastructures.
• This reinforces the need to react and complete the capital markets union.

The second line of defence: sound national fiscal policies

• National fiscal policies fulfil two key roles in a currency union.
• In many euro area countries, however, the labour tax wedge, in particular for low and second earners, remains too high, discouraging both labour supply and demand.
• [20] Such national efforts should be complemented by closer tax cooperation.
• [21] Equally concerning is that environment-related public R&D spending accounts for just 1.6% of total R&D spending across OECD countries.
• The second role of fiscal policy in a currency union relates to stabilisation and resilience.
• It proved toothless in good times when the need to build up sufficient fiscal buffers for bad times was ignored.
• And even when the euro area aggregate fiscal stance was considered broadly appropriate, such as in the most recent years, it was wrongly distributed across countries.
• Countries with fiscal space were not using it and those without fiscal space were trying to invent some.
• Strong and independent national fiscal councils should clearly explain to the public the potential consequences of imprudent fiscal behaviour for the stability of the country and the euro area as a whole.

The third line of defence: effective area-wide instruments

• The crisis revealed that systemic shocks can go beyond the capacity of national fiscal budgets to provide effective stabilisation.
• The European Stability Mechanism (ESM) has been a resounding operational success.
• Let me repeat: intergovernmental decision-making may be politically convenient in the short term, but it carries a high economic cost in the longer run.
• If we dont learn from past crises, we condemn ourselves to repeat them.
• What we are missing, are three complementary instruments.

A common European deposit insurance scheme

• The first is a common European deposit insurance scheme, which is a precondition for a truly integrated banking system and single money.
• I welcome the progress currently being made towards starting political negotiations on such a scheme.
• Today, only a handful of banks are deemed of public interest and subject to European resolution, leaving most bank failures to be addressed in nineteen different ways.
• Creating a single administrative tool for bank liquidation, as proposed by the International Monetary Fund, would be an important first step.

A common fiscal capacity

• The second missing instrument is a common fiscal capacity that provides macroeconomic stabilisation with a view to preventing, or mitigating, systemic shocks that is, before they turn into a full-blown crisis.
• We have also learned the hard way that coordination of national fiscal policies will not lead to an adequate fiscal stance for the euro area as a whole.
• [24] For all these reasons, the euro area needs a common fiscal instrument.
• All successful and stable monetary unions have genuine fiscal instruments, built on strong legal and market-based mechanisms ensuring fiscal discipline at the state level.
• Such an instrument should not replace national policies, but it will need to be large enough to complement them effectively.

A common safe asset

• The third instrument required is a common safe asset.
• A joint fiscal capacity and a safe asset can go hand-in-hand.
• [25] A safe asset would fix many of the remaining euro area faultlines.

Conclusion