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European Commission - Speech - [Check Against Delivery]

Vice-President Dombrovskis on the deepening of the economic and monetary union

Brussels, 31 May 2017

Good afternoon everybody,

Today, Europe is facing multiple challenges. And to address these challenges head-on, the European Commission has started a broad debate on the future of the EU with its March White Paper.

The reflection paper we are presenting today sets out possible ways to strengthen and complete the Economic and Monetary Union until 2025.

The euro is one of Europe's most significant achievements. It is the currency of 340 million people in 19 countries. It is the second most used currency around the world. It has brought price stability, has made it easier to make business and travel. The euro quickly became a symbol of prosperity for our citizens – it should remain this way.

The financial crisis underlined the weaknesses in the way we set up the euro. Our response to that crisis has made the EMU stronger – but we have not filled in all the gaps. There is still a lack of convergence, and doubts remain regarding the full stability and safety of the system.

With the recovery now firmly underway, this is a good time to complete our EMU. We cannot and should not wait for another crisis.

With today's paper, we put a toolbox on the table. We have taken a more targeted approach to what can be done over the next two years, and we're more open about what might come beyond that. 

We hope to feed into a constructive debate on how best to arrive at a shared vision on the future of EMU, which can then translate into a roadmap for concrete steps to be taken.

This will only be possible with a balanced approach in which responsibility and solidarity, risk reduction and risk sharing go hand-in-hand.

Clearly, the euro should remain open to all EU countries, and further integration among members should not risk the unity of the single market. Except for Denmark, all EU Member States are expected to eventually join the euro, even if there is no deadline set. 

Our ideas on the way forward are structured in three building blocks: Financial Union, Economic and Fiscal Union; EMU governance and accountability.   

On the Financial Union, we want to see renewed financial integration and safer financial institutions that finance our real economy and we want to see more risk sharing via private channels.

To do so, we need to accelerate our work to integrate and develop the Capital Markets Union, to give our companies more financing options and this then can act as shock absorbers in times of crisis.

Just yesterday we reached major political agreements on two important CMU building blocks. The deal on venture capital funds should further facilitate investment in small and growing companies. The agreement on securitisation should increase the ability of banks to lend to SMEs and households.

For banks, we have already improved supervision and mechanisms to deal with banks in trouble.

In parallel, in November we proposed banking legislation to further reduce risks in the system. We are working with Member States on a European strategy to reduce their stocks of non-performing loans. And we should continue to weaken the link between banks and their sovereigns.

It's in this context that we are closely following the ongoing work on so-called sovereign bond backed securities, notably the work of the European Systemic Risk Board.

Let me explain why this could be useful: if market participants bundle different Member States' sovereign bonds, this would allow banks and other buyers of these bundled securities to diversify their sovereign bond holdings, and enable more private sector risk sharing. In a way it would help to address the issue of bank-sovereign loops.

Let me be very clear: This would not involve any debt mutualisation between Member States. Nor would it involve changing the regulatory treatment of underlying sovereign bonds. That is not what these securities – or Sovereign Bond Backed Securities – are about.

Longer term, we also want to stimulate discussion about the zero risk weights attributed to sovereign bonds by our current banking rules. And we want to have a debate about a possibility to introduce a new European safe asset.

These are both complex and sensitive issues. That's why our Reflection Paper frames the discussion with strong caveats, notably in terms of preventing unwarranted consequences for financial stability or for moral hazard.

Now, I would like to make a few quick points on the Economic and Fiscal Unions.

First, we need to ensure convergence  between Member States towards more resilient economic structures. The bulk of economic and social policies is and will remain at the national level, and there is no doubt that we need a continuous commitment to structural reforms.

Second, in the longer term, stronger incentives for reforms can be considered, for example through financial support from the EU budget or via technical assistance.

Third, we are presenting three options for a macroeconomic stabilisation function for the euro area. This is meant to assist countries when they are hit by an economic shock too large for them to cope on their own.

One of the options is a European Investment Protection Scheme to protect investment in the event of downturn. As you know, in times of strain, public investment is usually the first item to be cut from the national budgets, and this can harm future growth.  An investment protection scheme could take the form of a financial instrument and I believe that it could be set up within the existing legislative framework.

Other options for stabilisation instruments include a European Unemployment Reinsurance Scheme and a rainy day fund. 

Whatever the instrument is set up, it should not lead to new permanent transfers between countries. Nor should they undermine the incentives for sound fiscal policy-making at national level.

I will stop here and pass the floor to Pierre for further elaboration, especially on governance and accountability.


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