Keynote Address at ADEMU kick-off conference from Joaquin Almunia

www.ademu-project.eu!

The politics around the Economic & Monetary Union

Joaquín ALMUNIA.

Keynote speech at ADEMU Conference

Cambridge (UK), 8-9 October 2015

www.ademu-project.eu!2

•  “5 Presidents report”: the new blueprint to complete EMU!

!•  “The euro is more tan just a currency. Itʼs a

political and economic project”!•  “EMU is like a house that was built over decades

but only partially finished”!


The idea of an Economic and Monetary Union is political.!!And itʼs a working process. A lot of political work to be done.! !EMU idea didnʼt emerged from the academia, but from some european political leaders, central bankers and personalities:!!•  Werner report 1970, troubles of Bretton Woods system end of

the 60ʼs!•  European Monetary System (Schmidt and Giscard) 1979,

response to the oil crisis!•  Delors Committee report 1989, Maastricht Treaty(1992):

consequence of the end of USSR and German unification!•  EMU is launched(1999): from a core group to 19 members. !!


•  During the first decade of EMU, we got very positive results, albeit with some clouds. In May 2008 the report “EMU@10” put forward the need of a “tool box” with new instruments. !

!•  Main achievements, according to the report:!!•  Inflation stability, just around ECB target!•  ECB, a very respected institution!•  Xrate above the initial level, a strong currency!•  Contributed to a culture of macroeconomic stability in

most of the EMU members!!


But also some clouds:!!•  no significant impact on growth or intra-eurozone trade!•  excesive public debt levels (IT, GR, but also others)!•  the breach of SGP rules by DE and FR, giving way to a

revised SGP in 2005!•  instead of economic convergence, competitiveness

divergences and lack of corrective mechanisms!•  no financial integration, neither prevention nor crisis

management mechanisms !•  weak governance, no adequate external representation!!


The crisis surprised the EMU (only the EMU?) unprepared!!The initial reactions (2007-2009) focused on the repair of the banking system and the figth against recession. Didnʼt addressed the EMU flaws we know today:!!•  The ECB provided illimited liquidity and lowered interest rates!•  The EU Recovery Plan was adopted, complying with the SGP

rules thanks to flexibility introduced in the 2005 revision. !•  Many financial institutions (25% of the total system) were

subject to bail-outs, based on national resources. !•  Some initiatives to improve crisis management (De Larosiere,

2009) were launched, but without substantial changes of the regulatory or supervisory framework!


The mutation into a public debt crisis showed real flaws of the EMU architecture, some of them pointed out in “EMU@10”:!!•  The ECBʼs mandate was unclear regarding QE and the “lender of last

resort” responsibilities.!•  Many decisions had to be improvised, mainly through an intergovernmental

decision-making process (EFSF, “Deauville agreement”, ESM)!•  The enforcement of the SGP rules, was not able to correct unsustainable

public debt paths. !•  The adjustments requested (Greece, May 2010) were excessive and

counterproductive, provoking a vicious circle.!•  Wrong diagnosis of the nature of imbalances (IRL, ES), fuelled by the

asimmetric impact of the single monetary policy!•  Lack of a Banking Union, producing negative feed-back loop between

sovereigns and financial institutions. !•  The “Troika” system failed, and triggered negative economic results and

deep social and political consequences.!


Some “colateral damages”: !!•  The ECB was obliged to take on its shouders too much

responsibility, invading the fiscal policy domain and being overburdened with new functions.!

!•  With the “Six pack”, the “Two pack” and the Fiscal compact the

framework is too complex and to avoid rigidities often require interpretation.!

!•  Intergovernmentalism increases tensions between creditors and

debtors, between “AAA” and lower rated MS !!•  A feeling of failure, despite many decisions adopted since 2008 and

some successes!


Whatʼs next? 5 Presidents report propose three goals:!•  A fully-fledged Banking Union is needed, to ensure

adequate transmision of monetary policy and to avoid negative feed-back loop!

•  Fiscal Union is needed: adequate “fiscal stance”, shock-absorbers and backstops, sensible governance!

•  Economic Union is needed, to reduce divergences and provide the right incentives for a sustainable growth path!

!


In other words, the debate is open:!!•  The inexistence of an Economic Union is at the origin of increasing economic divergences within euro

area national economies !•  Difficulties to absorb shocks if the EMU national economies have not a high degree of convergence !•  One monetary policy produces very different consequences given the divergences in inflation and CLUʼs.

There were not mechanisms to correct macro-economic imbalances.!•  There is a need of a fiscal instrument to provide the adequate “fiscal stance”!•  There are not “risk-sharing” channels. This is a key issue both for the financial and the public sectors !•  Financial sector: bail-in instead of bail-out as a rule!•  Will EMU provide a “risk-free” financial asset?!•  For the next crisis: !

–  a “lender of last resort” for illiquid MS? !–  ESM will become a EMF? !–  Mutualisation of risks? !–  Relations between debtors and creditors!


•  A lot of technical discussions ahead of us. Academia and policymakers must put in place a permanent channel of dialog.!

!•  But itʼs not only about the political economy of

EMU!


Some key issues from a political point of view:!!•  Political dimension of the EMU Project. More sovereignty to be shared!!•  The conditions for mutualisation and solidarity: responsibility of Member

States!!•  Questions around governance: rules or institutions? Towards a “minister” or

a “government” for the Euro área?!!•  Democratic legitimacy and accountability: a Parliament for the euro area?!!•  Relations between the “ins”, the “future ins” and the “outs”!!•  Irreversibility: yes or no?!


•  All of this is highly political. Therefore, Political Union is not at the end the work to be done, but must be placed at the beginning of the road map. !

!•  Without political will to share a higher degree of

sovereignty, the task will not be posible.!

Keynote Address at ADEMU kick-off conference from Joaquin Almunia

Economy & Finance

Transcript of Keynote Address at ADEMU kick-off conference from Joaquin Almunia