Keynote speech by Luis de Guindos, Vice-President of the ECB, at the Joint convention of the ECB and the European Commission on European financial integration
Frankfurt am Main, 6 April 2022
Introduction
It is my nice pleasure to open at the moment’s convention. I wish to use this chance to replicate on some necessary developments in financial integration which have taken place over the final two years, and assess them from the perspective of an EU financial system for the future – the title of at the moment’s convention.
I’ll start by relating the pandemic’s implications for the financial sector in Europe. I’ll focus on how the progress achieved on financial integration since the begin of Economic and Monetary Union (EMU) has helped to extend the resilience of the EU financial sector, earlier than arguing {that a} additional deepening of EMU may help sort out the present and future challenges that come our method. I’ll then conclude by reflecting on the financial fallout from the Russian invasion of Ukraine, and the implications that might have for financial stability and financial integration.
Financial integration now and in the previous
Let me first focus on the implications of the pandemic disaster. When the pandemic started, we noticed a notable lower in euro space financial integration. But because of quick and decisive coverage motion at the financial, fiscal and prudential ranges, this deterioration not solely stopped, it really reversed comparatively rapidly. This is in distinction to what has sometimes occurred in earlier crises.
As the pandemic unfolded, public well being measures, mobility restrictions and manufacturing constraints restricted family consumption ranges. This meant that key non-public channels of risk-sharing throughout euro space international locations have been restricted. So public risk-sharing by way of governments turned essential for macroeconomic stabilisation.
Major fiscal initiatives at EU stage have been key to making sure that dangers have been shared amongst Member States, compensating for the truth that non-public financial channels have been hampered. Sizeable fiscal risk-sharing mechanisms have been established with the Next Generation EU restoration package deal. The related investments and reforms are anticipated to enhance risk-sharing at the public sector stage over the coming years. Joint help from fiscal and financial coverage has been indispensable in avoiding a a lot deeper financial downturn. For instance, credit score help measures, corresponding to mortgage ensures, proved essential in shoring up the financing of corporations and households throughout the pandemic.
At the identical time, we must always not overlook the decisive position performed by the EU financial system in weathering the disaster, notably by with the ability to meet financing wants throughout the pandemic. The undeniable fact that the system may stand up to a shock the measurement of the pandemic is testomony to the efficient implementation of bold financial reforms in the aftermath of the world financial disaster.
But it’s necessary to do not forget that it took a variety of arduous work to realize this resilience. EU financial integration has come a great distance since the launch of EMU in 1992. Soon after the introduction of the euro, policymakers realised that the single foreign money alone was not sufficient to spur the additional improvement and integration of the EU financial system. Support was wanted from insurance policies that have been conducive to the free circulation of financial providers in the euro space, along with sufficient authorized, regulatory and supervisory frameworks, together with better institutional integration. There have been a number of milestones on the street in the direction of European financial integration, together with the European Commission’s Financial Services Action plan for the harmonisation of the EU financial providers markets beginning in 1999, the Lamfalussy structure to enhance regulatory processes launched in 2001, the launch of the banking union in 2012 and the two subsequent motion plans for the capital markets union (CMU) in 2015 and 2020.
Despite these achievements, there’s nonetheless extra work to be completed. We must push forwards and additional deepen EMU. And we want to take action whereas holding in thoughts the new challenges that we face, corresponding to the transition to a sustainable financial system.
The development of inexperienced finance can facilitate – and, at the identical time, profit from – the integration of EU capital markets throughout borders. Deeper and extra environment friendly capital markets, with fairness taking part in a better position, will be instrumental in encouraging the extra speedy improvement and adoption of latest applied sciences, together with inexperienced applied sciences, and in facilitating the provision of finance throughout the EU. Indeed, analysis finds that carbon-intensive industries have a tendency to cut back emissions sooner in economies with deeper inventory markets.[1]
Last November the European Commission printed the CMU package deal containing legislative proposals and key commitments in the CMU motion plan. This was an necessary step, however we must be extra bold in three primary areas if we’re to realize a deeply built-in CMU.
First, we have to see a harmonisation of insolvency guidelines and withholding tax regimes. That will assist create a extra built-in financial sector that may simply function throughout borders, together with in inexperienced market segments. The ECB is due to this fact trying ahead to the upcoming Commission proposals on this matter.
Second, lowering the debt-equity bias and harmonising enterprise capital frameworks throughout Member States are necessary steps to help fairness and danger capital markets and thereby present smoother financing for innovation.
Third, we have to make progress on the EU’s sustainable finance agenda. There ought to be no extra delays as we attempt for a dependable and clear regulatory framework. Sustainability disclosures and dependable requirements for inexperienced financial merchandise are key to reaping the advantages of a inexperienced CMU. This is why we want the Corporate Sustainability Reporting Directive to be applied swiftly, alongside the broad adoption of a sound and usable European inexperienced bond normal.
While CMU is a vital pillar for EMU, we additionally must see progress on different fronts. The banking union stays incomplete. But finishing it’s important if we’re to reinforce the financial sector’s resilience and additional tackle a few of its structural challenges. These embody low financial institution profitability, rising competitors from fintech corporations and the fragmentation of debt and fairness markets alongside nationwide strains.
Completing the banking union requires efforts in two areas: bettering the disaster administration framework and making progress in the direction of a European deposit insurance coverage scheme (EDIS). We very a lot welcome the balanced workplan proposed by the Eurogroup President, which ought to present foundation for reaching political settlement on these issues as swiftly as doable.
Another component to making sure that banks additional enhance their resiliency is the well timed and full implementation of the remaining components of the Basel III settlement. The ECB welcomes the Commission’s proposals on this respect, which is able to result in a stronger prudential framework and assist sort out rising dangers, corresponding to environmental dangers.
Pushing forward with these necessary initiatives will additional strengthen Europe’s resilience to future crises, permitting us to reply rapidly. After all, the horrible occasions of the final six weeks have reminded us how rapidly the financial surroundings can change.
Financial stability and integration in view of the Russia-Ukraine conflict
The Russian invasion of Ukraine marks a watershed second for Europe. This is, firstly, a human tragedy. But the financial fallout has additionally re-introduced substantial components of uncertainty simply as the euro space financial system is rising from the pandemic.
In the first weeks after the invasion, we noticed seen implications for financial integration in the euro space, pushed primarily by bond markets. Announcements of sanctions towards Russia led – initially, not less than – to a slight divergence of sovereign and company bond yields throughout euro space international locations. This precipitated euro space indicators of financial integration to recede – as captured, for occasion, by a measure of the convergence of asset costs throughout the euro space. But the excellent news is that this indicator has partly recovered since then. And, importantly, these actions have been nowhere near what we noticed throughout the world financial disaster and at the starting of pandemic.
For the euro space, the financial stability impression of the conflict has up to now been comparatively contained. Markets have typically been functioning nicely. Contrary to what occurred in March 2020, there was no sprint for money. While each banks and non-banks have been affected – particularly the few which have giant direct exposures to Russia and Ukraine – the financial fallout has not had a sizeable impression on the EU banking or financial programs as an entire. Euro space banks’ preliminary inventory worth response recommended a a lot stronger impression than was implied by their direct exposures, which stood at lower than 1% of banks’ belongings. This factors to a lot better issues about development and inflation, and the impression the battle is having in amplifying them.
The invasion of Ukraine additionally demonstrated how susceptible Europe is because of its excessive dependency on fossil gas imports from Russia. Speeding up the inexperienced transition is a key precedence from this angle too – not solely to handle the pressing environmental and local weather challenges we face, but in addition to assist enhance our power safety and shield the EU financial system from power worth spikes.
Recent occasions have reaffirmed the significance of financial integration. First, financial integration along with sufficient regulatory and supervisory frameworks improves the resilience of the EU financial system and its financial sector. In specific, the sound capital and liquidity buffers which have helped European banks take up shocks owe lots to the Single Rulebook and European banking supervision – key components of our banking union.
Second, financial integration has improved our potential to take credible actions and has given these actions better weight. Close collaboration in varied features of EU financial decision-making allowed EU financial sanctions to be adopted swiftly and applied constantly. And the ECB, for its half, is taking an lively position in implementing these sanctions in its areas of competence.
Conclusion
Let me conclude.
European integration has already come a great distance since the begin of EMU. But we aren’t at the end line simply but. Our journey is an bold one, and we should quicken our tempo.
During this troubled time for Europe, I’m reminded of the phrases of Konrad Adenauer, the first Chancellor of West Germany. He as soon as mentioned: “European unity was a dream of a few people. It became a hope for many. Today it is a necessity for all of us.”
These phrases have been spoken virtually 70 years in the past, simply as the wheels of European integration have been turning sooner. Let us maintain these wheels transferring. Our present challenges name for decisive joint motion from all of us as we work in the direction of a strengthened European financial system and a strong EMU. I’ve little question that we are going to attain the end line.
Thank you for your consideration.