On March 21st, in Salzburg Germany, the Member of the Executive Board of the ECB, Gertrude Tumpel-Gugerell, spoke at the Investment form about the Euro and its future. Ms. Tumpel-Gugerell started out the speech saying “it was the Austrian economist Joseph Schumpeter who stated that “a nation’s monetary system is a reflection of everything that the nation wants, suffers and is. … Nothing says what a nation is made of so clearly as what it does in terms of its monetary policy.” During the speech, she discussed the current economic situation; how the single currency has contributed towards the management of the financial market crisis; the overview of the financial market reforms in the European Union and an outline of what is still to be done to guarantee the stability of the euro over the long-term horizon.
Ms. Tumpel Gugerell stated in her speech in regards to safeguarding the euro that “in order to counter the potential systemic implications of the government debt situation in a number of euro area countries in a decisive and timely manner, the Heads of State or Government in the EU have agreed on the establishment of a permanent European Stability Mechanism (ESM) to safeguard fiscal stability in the whole euro. This mechanism will supersede the European Financial Stability Facility (EFSF), which will remain temporarily in place until June 2013. The ESM will be activated when the financial stability of the euro area as a whole is in jeopardy. Member countries in financial distress will receive financial assistance in the form of credit, subject to their fulfilment of strict conditions. I regard this decision as an important contribution to keeping the financial system stable, and thus to safeguarding the stability of the euro. Nevertheless, the existence of this mechanism should not be seen as an inducement to postpone a correction of the stance of economic policy for too long and to trust in the help of other euro area countries. In order to prevent this from happening, it is essential that the permanent stabilisation mechanism is underpinned by a fundamental strengthening of the regulatory framework for compliance with fiscal policy objectives and the need for competitiveness. It is thus crucial that the framework for monitoring both the public budgets and economic activity in the euro area is reformed in an effective manner. The Van Rompuy task force and the European Commission have put forward proposals on how improvements can be made in these two areas. The proposals recommend a strengthening of the Stability and Growth Pact. In particular, it is suggested that possible sanctions for member countries with excessive deficits should be imposed sooner than currently foreseen. Next year, an enhanced macroeconomic surveillance framework applicable to the euro area will also be implemented. This comprises the introduction of an early warning mechanism based on a scoreboard of predefined macroeconomic indicators. At the same time, the European Commission will assume responsibility for using these indicators in order to identify potential macroeconomic imbalances and excesses, and then reporting thereon to the political authorities. The ECB is of the opinion that the current reform efforts in both areas are not sufficiently extensive. In fact, the Governing Council of the ECB considers that while the proposals tabled by the European Commission may indeed go some way towards improving macroeconomic and fiscal surveillance in the euro area, they fall short of the quantum leap forward that is needed in the surveillance of the euro area and in order to guarantee the smooth functioning of Economic and Monetary Union. As regards fiscal surveillance, greater automaticity of procedure and the definition of clear and binding regulations for reducing debt ratios are required. In terms of macroeconomic surveillance, clearly defined sanctions are necessary. Efforts must focus more clearly on the most vulnerable countries (those which have suffered from losses in competitiveness), in order to ensure the sustainable effectiveness of the latest framework. Moreover, the procedure requires more transparent and more effective trigger mechanisms. In the future, the stability of the euro, the stability of the financial system and sound economic and financial policies will need to be viewed as inseparable from one another. The Monetary Union was designed to be an economic and monetary union. What we need now is also the second pillar. The ECB has done what it can by pursuing a stability-oriented monetary policy, by keeping the value of money stable and by providing for crisis-related liquidity needs. The other policy domains mentioned are now called upon to shoulder their part of the burden and safeguard the stability of both the financial system and the single currency over the long term.”
She continues to say that “A single market and a common currency also demand well-coordinated economic and fiscal policies. This calls for clear rules and mechanisms for monitoring these policies. Allow me to now briefly discuss the three key areas which I consider to be vital to the long-term success of the euro. These elements are: a sound fiscal policy, sustainable economic growth and a stable financial system. The soundness of public finances was to be guaranteed by the Stability and Growth Pact. Unfortunately, however, the rules of the Pact have been ignored all too often – even prior to the financial crisis. For this reason, it is imperative that, first, fiscal consolidation efforts at the European level comply with the rules of the Stability and Growth Pact. Second, the foundations of the Stability and Growth Pact are in need of reinforcement. Stable prices are a precondition to sustainable growth and the generation of employment. Equally important is the competitiveness of euro area member counties. In some euro area countries, excessive increases in unit labour costs and current account imbalances have caused their competitiveness to decline significantly over the past few years. This meant that some countries were in a position where they were unable to respond to the crisis with the degree of flexibility required, which resulted in weakening economic and productivity growth and a surge in unemployment.. To combat this, economic reforms that foster growth and employment on a sustainable basis are essential. Such reforms should be directed at increasing competitiveness. To this end, flexible labour and product markets are required, as well as long-term projects to enhance infrastructure and competitiveness and, above all, the promotion of innovation through investment in training and research. The financial crisis has illustrated the significance of systemic risks. It has made clear that the procedures in place for assessing threats – stemming from the proliferation of individual, mutually reinforcing, risks of relevance to the stability of the financial system or the real economy as a whole – were inadequate. The governments and central banks have both contributed to stabilising the financial system. Its lasting stabilisation, however, calls for institutional reforms that lead to a better regulation and supervision. In addition, it is essential that consideration be given to the question as to how the private sector itself might be able to better protect itself against the consequences of a financial crisis, in order to create stronger incentives for risk awareness and a longer-term perspective in economic activities undertaken in the financial sector. “ Source; ECB
Source: www.balkans.com
Ms. Tumpel Gugerell stated in her speech in regards to safeguarding the euro that “in order to counter the potential systemic implications of the government debt situation in a number of euro area countries in a decisive and timely manner, the Heads of State or Government in the EU have agreed on the establishment of a permanent European Stability Mechanism (ESM) to safeguard fiscal stability in the whole euro. This mechanism will supersede the European Financial Stability Facility (EFSF), which will remain temporarily in place until June 2013. The ESM will be activated when the financial stability of the euro area as a whole is in jeopardy. Member countries in financial distress will receive financial assistance in the form of credit, subject to their fulfilment of strict conditions. I regard this decision as an important contribution to keeping the financial system stable, and thus to safeguarding the stability of the euro. Nevertheless, the existence of this mechanism should not be seen as an inducement to postpone a correction of the stance of economic policy for too long and to trust in the help of other euro area countries. In order to prevent this from happening, it is essential that the permanent stabilisation mechanism is underpinned by a fundamental strengthening of the regulatory framework for compliance with fiscal policy objectives and the need for competitiveness. It is thus crucial that the framework for monitoring both the public budgets and economic activity in the euro area is reformed in an effective manner. The Van Rompuy task force and the European Commission have put forward proposals on how improvements can be made in these two areas. The proposals recommend a strengthening of the Stability and Growth Pact. In particular, it is suggested that possible sanctions for member countries with excessive deficits should be imposed sooner than currently foreseen. Next year, an enhanced macroeconomic surveillance framework applicable to the euro area will also be implemented. This comprises the introduction of an early warning mechanism based on a scoreboard of predefined macroeconomic indicators. At the same time, the European Commission will assume responsibility for using these indicators in order to identify potential macroeconomic imbalances and excesses, and then reporting thereon to the political authorities. The ECB is of the opinion that the current reform efforts in both areas are not sufficiently extensive. In fact, the Governing Council of the ECB considers that while the proposals tabled by the European Commission may indeed go some way towards improving macroeconomic and fiscal surveillance in the euro area, they fall short of the quantum leap forward that is needed in the surveillance of the euro area and in order to guarantee the smooth functioning of Economic and Monetary Union. As regards fiscal surveillance, greater automaticity of procedure and the definition of clear and binding regulations for reducing debt ratios are required. In terms of macroeconomic surveillance, clearly defined sanctions are necessary. Efforts must focus more clearly on the most vulnerable countries (those which have suffered from losses in competitiveness), in order to ensure the sustainable effectiveness of the latest framework. Moreover, the procedure requires more transparent and more effective trigger mechanisms. In the future, the stability of the euro, the stability of the financial system and sound economic and financial policies will need to be viewed as inseparable from one another. The Monetary Union was designed to be an economic and monetary union. What we need now is also the second pillar. The ECB has done what it can by pursuing a stability-oriented monetary policy, by keeping the value of money stable and by providing for crisis-related liquidity needs. The other policy domains mentioned are now called upon to shoulder their part of the burden and safeguard the stability of both the financial system and the single currency over the long term.”
She continues to say that “A single market and a common currency also demand well-coordinated economic and fiscal policies. This calls for clear rules and mechanisms for monitoring these policies. Allow me to now briefly discuss the three key areas which I consider to be vital to the long-term success of the euro. These elements are: a sound fiscal policy, sustainable economic growth and a stable financial system. The soundness of public finances was to be guaranteed by the Stability and Growth Pact. Unfortunately, however, the rules of the Pact have been ignored all too often – even prior to the financial crisis. For this reason, it is imperative that, first, fiscal consolidation efforts at the European level comply with the rules of the Stability and Growth Pact. Second, the foundations of the Stability and Growth Pact are in need of reinforcement. Stable prices are a precondition to sustainable growth and the generation of employment. Equally important is the competitiveness of euro area member counties. In some euro area countries, excessive increases in unit labour costs and current account imbalances have caused their competitiveness to decline significantly over the past few years. This meant that some countries were in a position where they were unable to respond to the crisis with the degree of flexibility required, which resulted in weakening economic and productivity growth and a surge in unemployment.. To combat this, economic reforms that foster growth and employment on a sustainable basis are essential. Such reforms should be directed at increasing competitiveness. To this end, flexible labour and product markets are required, as well as long-term projects to enhance infrastructure and competitiveness and, above all, the promotion of innovation through investment in training and research. The financial crisis has illustrated the significance of systemic risks. It has made clear that the procedures in place for assessing threats – stemming from the proliferation of individual, mutually reinforcing, risks of relevance to the stability of the financial system or the real economy as a whole – were inadequate. The governments and central banks have both contributed to stabilising the financial system. Its lasting stabilisation, however, calls for institutional reforms that lead to a better regulation and supervision. In addition, it is essential that consideration be given to the question as to how the private sector itself might be able to better protect itself against the consequences of a financial crisis, in order to create stronger incentives for risk awareness and a longer-term perspective in economic activities undertaken in the financial sector. “ Source; ECB
Source: www.balkans.com
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