Towards a European Financial Union and a More Solid European Banking Sector
Prepared remarks presented at a European Breakfast meeting at the Peterson Institute for International Economics
Ladies and gentlemen, first of all, let me thank the Peterson Institute for inviting me here today. I am well aware of the work that your institute is carrying out on a number of very timely topics relating to financial regulation, the debt crisis, and ways to restore growth. Thanks to the high quality of your papers, your thinking is an important contribution to the ongoing debates in Europe and worldwide.
Looking at the situation in Europe, I know that the sentiment here in the United States has sometimes been that Europe has done too little, too late. But we cannot forget that the European Union is not a Federal State. For more than 50 years, European countries have been integrating their industries, their trade, and their economies. The European Union is unique in the world in this regard. Just like the United States was unique at its inception. We still have 27 governments, 27 ministries of finance, and 27 central banks in the decision-making process. With the accession of Croatia, we will soon be 28 around the table.
Less than two weeks ago, the EU Member States agreed on a compact for growth and jobs. It includes in particular 120 billion euros of new joint investments. This is very important. As was underlined recently at the G-20 summit, fiscal discipline and austerity measures —as necessary as they are—need to be accompanied by radical measures to support growth. Euro area countries also agreed to step up the European Stability Mechanism (ESM), our new European intervention fund. The ESM will be entitled to buy sovereign bonds, provided that the countries concerned fulfil their commitments as regards fiscal consolidation and structural reforms.
And we are moving towards a banking union. This is not a small step and it will change the way we deal with financial crises in the future. When the financial crisis spread to Europe in 2008, we had 27 different regulatory systems in place. All based on national rules and national rescue measures. Some form of European coordination did exist. But the goal was limited to exchanges of views and rather informal cooperation procedures. That system was not sufficient. And the result is well-known: Some European banks got into big trouble, all of these banks were considered too big to fail, and so they were saved by public money. Between October 2008 and October 2011, European countries have given 4.5 trillion euros in public support and guarantees to their banks. This is clearly not acceptable.
We want to break this link between states and their banks. With the future banking union, the situation will be different. There will be one European supervisor to deal with ailing banks and financial crises. How are we going to build this banking union?
Let me make three points:
First, we are not starting from scratch. Since I took office two and a half years ago, one of my key tasks has been to strengthen EU banks. It is sometimes claimed that the EU is regulating to the detriment of certain actors, in particular the city of London. I can assure you that this is incorrect. We have seen in recent years that the reckless and immoral behaviour of a few institutions has created enormous damage for the financial sector itself and society as a whole. The recent scandal around the London Interbank Offered Rate (LIBOR) is but an example.
But I would like to underline that the financial industry in general is a true asset for Europe. And we want our financial centres, including the city, to prosper. That is why it is so important for me to have the British authorities fully on board when we adopt new financial legislation: to make sure that all new rules are proportionate and contribute to making the financial sector more stable, more solid, and more efficient, allowing it to fully serve the real economy.
So what have we done so far? We now have three pan-European supervisory authorities for banks, insurance, and securities markets. They have been operational since January 2011. And in October last year, European leaders decided on a major capitalization exercise for the 27 biggest European banks.
The European Banking Authority published the results of this exercise yesterday. The capital shortfall when the exercise started was estimated at 76 billion euros. However, on the 30th of June this year, the banks in question had raised 94.4 billion euros! And substantial parts of this capital were raised directly on the capital markets, with the need for a public backstop only in a very limited number of cases. This is good news as regards the solidity of the EU banking sector.
More generally, we are putting in place common rules for all EU banks. Europe will soon be the first region in the world to have translated the Basel III agreement into binding law. We will apply these rules to more than 8,000 European banks.
I welcome the fact that the US regulators have taken steps in the same direction by publishing their draft capital rules. We will continue to monitor the progress made on delivering on this and other G-20 commitments in other jurisdictions.
As in other areas of financial regulation—and let me just mention OTC-derivatives, international accounting standards, and insurance—it is very important that we all advance in parallel in order to avoid regulatory arbitrage, and ensuring that global financial firms can work in a solid and coherent legal framework.
The EU legislation ensures this international consistency through our equivalence-approach. I know that this is not the approach used in the United States, but what matters is not so much the legal methodology but ensuring that we recognize each other’s' regulatory and supervisory systems. This is my key message to the American regulators.
Let me now revert to the banking union and its main building blocks: I have mentioned supervision and capital rules. In early June, we proposed EU rules for bank recovery and resolution to make sure that supervisory authorities have all the tools they need to deal with bank failures without taxpayers' money.
Banks can fail. We know that. Like any other company. Our proposal will ensure that corrective measures are taken at an early stage. And if the worst comes to worst, the rules will make sure that banks can be resolved without any disruption of the real economy.
That said, we cannot deny that there are still a number of big issues ahead. This is my second point. First, we cannot have more integration and solidarity without clear and effective backstops. The American experience with the Federal Deposit Insurance Corporation (FDIC) is a source of inspiration for Europe. If we want one single European resolution system for failing banks, if national deposits insurance schemes are to be pooled, if the European Stability Mechanism is allowed to recapitalize banks directly, then we need pan-European supervision with real teeth. And we need to decide on who should exercise this supervision.
The recent Summit of the EU leaders stressed that the single supervisor should involve the European Central Bank (ECB). We are currently working on the technical and legal modalities around this new structure.
Many of you wonder whether the Banking Union should apply to all 27 EU countries, or only for the 17 euro area countries? Of course, no non-euro area country can be forced to participate. But my personal view is that we must do all we can to build a banking union for all 27, to preserve the single market and avoid fragmentation.
As I often say, there is only one single market. And this single market needs a single rule book and integrated supervision. We will present our legislative proposal on the single supervisory mechanism in September.
Third and last point: we are not losing sight of the broader picture. The Banking Union is part of a more fundamental project. In the longer term, we are heading towards a much more integrated Financial Union: first, a real economic union.
The crisis has shown us that we cannot have a monetary union without an economic union. That is why we have reviewed our economic coordination framework and put in place the so-called European semester. The European Commission now makes a detailed analysis of each member state's imbalances, followed by targeted recommendations for each country.
The second pillar: a fiscal union. We want to complete economic integration with stronger budgetary integration. My conviction is that we will need to pool more resources through a higher EU budget and, one day, through eurobonds. Eurobonds could for example be issued for amounts of debt below 60 percent of a member state’s GDP. This would considerably reduce spreads. And increase euro area countries' margins of maneuver. However, as you know, some member states, including Germany, are still opposed to eurobonds without increased EU monitoring of member states' spending. I understand this point of view: Pooling of resources and solidarity must go hand-in-hand with responsibility and transparency.
We already have common targets for public debt and deficits. And the "European semester" includes a collective right to review the annual budget of each member state before it is finalized. But once again, we need to go further and collectively agree to give the EU stronger powers to oversee national budgets.
Ladies and gentlemen, let me conclude by saying that there are two final conditions for this banking, economic, and fiscal union to become reality. First, we must build on the current momentum. Second, we must step up the democratic support and control of the European Union.
We need an integrated financial union with enhanced democratic control. We need more democracy at the bottom. And we need to provide responses to the many citizens in Europe today who feel disconnected from their politicians, citizens who, as a consequence, increasingly vote for populist parties on the left and on the right. These parties are on the rise in many European countries, including the one I know best. So we need to explain Europe better through more involvement of national parliaments. And through the European Citizens' Initiative, which now allows one million EU citizens to submit a legislative proposal to the Commission. But we also need more democracy at the top.
My conviction is that we should have an EU Finance Minister, subject to strong democratic control from the European Parliament and national parliaments. At some point in the future, I also believe that we should combine the role of the President of the European Commission and the President of the European Council. Through more democracy we will build a stronger Europe, both in economic and political terms—a Europe that will continue to be relevant in an increasingly globalized world.