Economic and Monetary Union in Europe

Home , European Banking union, European Monetary System

Boris Kisselevsky Head of ECB Representative Office in Economic and Brussels Monetary Union in DG International and European Relations Europe

ECB Central Banking Seminar Frankfurt, 9 July 2018

Rubric

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

2 www.ecb.europa.eu © Rubric

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

3 www.ecb.europa.eu © Rubric

Progress of European integration

1952 ECSC European Coal and Steel Community 1958 EEC and EURATOM European Economic Community European Atomic Energy Community 1967 EC European Communities 1993 EU European Union (Maastricht Treaty) 1998 ECB Founding of the European Central Bank 2009 EU Treaty of Lisbon

www.ecb.europa.eu ©

Rubric

Preparation of Economic and Monetary Union (EMU)

1970 Werner Report 1988 Delors Report

on economic and monetary union 1998 Founding of the ECB

1979 EMS 1999/2002 Introduction of the euro European Monetary System

1986 Single European Act

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Three stages to Economic and Monetary Union (EMU)

1 January 2002 Introduction of euro banknotes and coins

3 1 January 1999 Irrevocable fixing of conversion rates, ECB responsible for monetary policy

2 1 January 1994 Establishment of the European Monetary Institute, the ECB’s predecessor

1 1 July 1990 Abolition of all restrictions on the movement of capital

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Rubric

Economic and Monetary Union (EMU)

EU Member States SE which have adopted FI the euro

EU Member States EE

with a special status LV DK LT

EU Member States IE NL UK PL with a derogation DE BE LU CZ SK AT FR HU SL HR RO IT

ES GR PT

MT CY www.ecb.europa.eu © Rubric

In practical terms, EMU means:

• Coordination of economic policy-making between Member States • Coordination of fiscal policies, notably through limits on government debt and deficit • The single currency and the euro area with an independent monetary policy under the responsibility of the ECB • Single rules and supervision of financial Institutions within the euro area under the responsibility of ECB Banking Supervision

8 www.ecb.europa.eu © Rubric

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

9 www.ecb.europa.eu © RubricMain actors

Divided responsibilities between Member States and the EU institutions:

• The European Council – sets the main policy orientations • The Council of the EU (the 'Council') – coordinates EU economic policy-making and decides whether a Member State may adopt the euro • The 'Eurogroup' – coordinates policies of common interest for the euro-area Member States • The Member States – set their national budgets within agreed limits for deficit and debt, and determine their own structural policies involving labour, pensions and capital markets • The European Commission – monitors performance and compliance • The European Central Bank (ECB) – sets monetary policy, with price stability as the primary objective, and acts as central supervisor of financial Institutions in the euro area • The European Parliament - shares the job of formulating legislation with the Council, and subjects economic governance to democratic scrutiny

10 www.ecb.europa.eu © RubricLegislative process at EU level

Legislative Process (ordinary legislative procedure)

Endorsement of Trilogue agreement by Council and Parliament

Trilogues Council + Parliament + COM

EUROPEAN COUNCIL (ECOFIN) PARLIAMENT: General Approach ECON Report ECB Opinion

MEPs COREPER EFC negotiating ECB Membership team CWP FSC ECB Observer ECB Membership

Commission (COM) Proposal ECB response to COM’s Public Consultation

11 www.ecb.europa.eu © Rubric Trilogues

• Informal tripartite meetings between COM reps, EP (ECON) and Council (ECOFIN) • Formed when there is disagreement on the legislative proposal between the EP and the Council • Final output: package of amendments accepted by both the EP and the EU Council

Adoption of legislative proposal (by EP and Council)

PLENARY COUNCIL [Formation] Approved in 1st reading Confirmation

Agreement reached in Trilogues Trilogues Council + Parliament + COM

12 www.ecb.europa.eu © Rubric ECB-RESTRICTED

The ECB in the European legislative process

• Art 127 TFEU foresees that the ECB shall be consulted on any proposed Union act in its fields of competence. It publishes opinions to this effect, which are addressed to the EP and Council.

• Art 134 TFEU grants the ECB’s participation in the Economic and Financial Committee (EFC)

• Art 138 TFEU foresees the Council’s prior consultation of the ECB when adopting common positions on matters of interest for the EMU and measures to ensure unified representation in international fora

• Art 48 TEU establishes that the ECB shall also be consulted in the case of institutional changes in the monetary area

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Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

14 www.ecb.europa.eu © RubricWhat comes next? ECB-RESTRICTED

Only 11 months to the next European elections

March-May 6 13-14 1 March 2018: 2 May 2018 28-29 June 15-18 April 23-26 May December December 2019 30 March November last 2018 2019 2019 2017 2018 TAX3 2019 2019 package of European European Special new Legislative legislative proposal for Council Council Committee Commission package proposals MFF 2021- (BU Last EP European (EMU on AML to Brexit takes office on EMU on financial 2027 roadmap) plenary*** Elections deepening) report deepening* files**

* Including on ESM, ** Including on ***Last chance to Fiscal Compact crowdfunding/crowdl approve open integration, European ending platforms, legislative files Finance Ministry, Covered Bonds, Structural Reform SBBS, investment Support Programme stabilisation function

15 www.ecb.europa.eu © Rubric Topics on the Brussels agenda in the year ahead

• Completing EMU, incl. • reform of the European Stability Mechanism (ESM) • Backstop to the Single Resolution Fund; • (potentially) European Deposit Insurance Scheme (EDIS) • EU multi-annual financial framework 2021-2027, incl. • Reform delivery tool and convergence instrument • Investment stabilization function • Financial legislation, incl. current legislative discussions on • Prudential regulation of investment firms • Covered bonds • Non-performing loans • European Supervisory Authorities review • Files related to market infrastructures and central clearing, in particular review of the European Market Infrastructure Regulation (EMIR2) and recommendation to amend Article 22 of the ECB/ESCB statute • Brexit, Trade, anti money laundering 16 www.ecb.europa.eu ©

CompletingRubric EMU What next? Financial union • Break sovereign- bank nexus • Foster private risk- sharing • Create more resilient and efficient financial sector

Economic union Fiscal union • Reduce country • Reduce country imbalances and imbalances and vulnerabilities vulnerabilities EMU • Bolster shock •Create tools for absorption macro-economic stabilisation • Increase potential growth

Political union • Right balance of Crisis competences management between European and national level • A reformed ESM • Commensurate legitimacy arrangements

17 www.ecb.europa.eu © Rubric

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

18 www.ecb.europa.eu © FinancialRubric Union: State of play

Innovations since the crisis • Single Supervisory Mechanism fully established and performing • Single Resolution Board: in place and successfully tested in a few first cases • Single Rulebook: Strengthened capital requirements and move towards “bail in” paradigm • Improved macro-prudential framework • Significant progress in risk reduction • Roadmap for progressing with European Deposit Insurance Scheme • Action Plan on Building a Capital Markets Union

The agenda ahead • Complete the missing elements of a genuine European banking union • Foster cross-border private risk sharing through an ambitious Capital Markets Union agenda

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Rubric

Significant risk reduction since 2014 (start of SSM)

Evolution of fully loaded Common Equity Non-Performing Loans ratio Tier 1 (CET1) ratio 8% 15% 8% 14% 13.4% 7% 7.6% 13% 7% 12% 11.2% 6% 11% 5.4% 6% 10% 5%

Source: COREP, ECB calculations. Source: FINREP, ECB calculations. Liquidity Coverage Ratio Net Stable Funding Ratio

145% 142.5% 115% 111.9% 140% 110% 135% 130% 128.2% 105% 102.7% 125% 100% 120% 115% 95% 110% 90%

Source: COREP, STE data, ECB calculations. Source: STE data, ECB calculations.

Notes: All weighted averages are weighted by the denominator. TS definitions, as in Banking Supervisory Statistics, The analysis is based on a sample of 103 significant institutions (SIs) that reported RWA (COREP) and total assets (FINREP) in all time periods

20 www.ecb.europa.eu © Rubric Significant risk reduction (II): NPLs

21 www.ecb.europa.eu © Rubric The missing elements of Banking Union

Banking Union

Single Single Resolution European Supervisory Mechanism Deposit Mechanism Single Resolution Board Insurance Scheme

European Central Bank National Resolution Authorities Deposit Insurance

Single & National Fund

National Competent Resolution Funds Authorities Bridge financing National DGSs Backstop

Options and National Discretions Supervision of investment Single Rulebook firms Fit and proper

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European Deposit Insurance Scheme

3rd pillar of Banking Union – final component to remove national bias and weaken link between banks and sovereigns • Politically controversial: legacy issues, moral hazard; sequencing issues over risk reduction vs risk sharing. Roadmap for starting political discussions on EDIS under preparation. • Significant and thus sufficient risk reduction has been achieved, to unlock negotiations and frame roadmap with milestones towards EDIS • Conditions for operationalising the backstop to the Single Resolution Fund are now within reach. 23 www.ecb.europa.eu ©

Rubric Capital Markets Union: beyond a bank-based economy

Share of bank and non-bank financing in total non-financial corporation financing (cumulated transactions, percentages)

bank non-bank 100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0% 2002-2008 2002-2016Q1 2002-2008 2002-2016Q1 euro area US

Source: ECB, Federal Reserve System. Notes: Calculations are based on cumulated transactions since 2002. Latest observation: Q1 2016.

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Rubric Capital Markets v. Bank Financing

ABS = asset-backed securities CLO: collateralised loan obligation MBS: mortgage-backed securities 25 www.ecb.europa.eu ©

Rubric Capital Markets Union initiatives

Increasing relevance European Venture Capital Simple, Transparent and Debt-equity tax bias: Fund Regulation, European Standardised Securitisation Common Consolidated Social Entrepreneurship Regulation Corporate Tax Base Directive Fund Regulation

Prospectus Regulation Review of the European Crowdfunding Regulation Supervisory Authorities

Regulation on the Sustainable Finance Action Supervision of Investment Plan Firms Adopted Proposed FinTech Action Plan

Pan-European Pension Product Regulation

Various initiatives regarding insolvency

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

27 www.ecb.europa.eu © Rubric Challenges to public finances in the crisis General government budget balance General government gross debt (1995-2017, percentage of GDP) (1995-2017, percentage of GDP)

Data source: European Commission, Autumn Forecast 2017.

Innovations on the Stability and Growth Pact • Reform of the framework: stronger emphasis on structural balances, expenditure and debt rules • More flexibility of the SGP • Stronger role for the Commission: • Introduction of Fiscal Compact • A self-standing discussion on the euro area fiscal stance • An independent European Fiscal Board

Beyond rules: a euro area fiscal capacity • Complement monetary policy in stabilising euro area economy • Steering euro area aggregate fiscal stance • Assist in dealing with asymmetric shocks

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

Programme Governance Instruments Legal status work

Enhanced role in ESM should All instruments In the long-run, macro-economic become more are useful. But establishment of adjustment agile in its not all equally ESM as body of programmes decision making operational the Union

And more European ESM should effective and Monetary Fund is Possibly more provide backstop credible by the wrong name: clarity on debt to the Single ensuring it will not be sustainability Resolution Fund independent staff financed with framework for liquidity and analysis and monetary solvency advice. resources

Agreement on ESM reform at June 2018 Euro Summit

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

Economic union: governance framework

Innovations since the crisis • Macroeconomic Imbalance Procedure • Various adjustment programmes • National Productivity Boards

The agenda ahead • New convergence process towards resilient economic structures

33 www.ecb.europa.eu © Rubric Euro area economies are far from the frontier in economic structures The quality of institutions affects resilience to … and economic growth shocks…

Probability of crisis events occuring, conditional Potential growth of annual private sector investment (%) if half of the gap on the quality of institutions. toward the best performing economic structures is closed.

Source : Sondermann (2018), Towards more resilient economies, Source: ECB analysis Journal of Policy Modelling 40(1), pp. 97-117).

change by… Lack of sufficient change by… structural reforms

Enforce by strengthening competencies at Incentivising necessary the centre (EU/EMU level decision making) national polices

Threat of sanctions in Macro- Use of EU economic Imbalance direct funding Binding reform Procedure for specific corrective process towards goals (e.g. arm Market discipline (best practice) investment; benchmarks public goods) Technical assistance More effective use of Single Market Use of conditional tools (e.g. services) financial incentives for undertaking reforms (e.g. through EU budget)

Overview

1 Key facts and figures of Economic and Monetary Union (EMU) 2 Institutional architecture of EMU and legislative process at EU level 3 Deepening EMU

4 Financial Union/Banking Union

5 Fiscal Union

6 ESM reform

7 Economic Union 8 Conclusions

Economic and Monetary Union

• A single currency with an independent monetary policy under the responsibility of the ECB • Coordination of economic policy-making between Member States • Coordination of fiscal policies, notably through limits on government debt and deficit • Single rules and supervision of financial Institutions within the euro area under the responsibility of ECB Banking Supervision • Completing EMU remains a policy priority, notably concerning • reform of the European Stability Mechanism (ESM) • Backstop to the Single Resolution Fund; • European Deposit Insurance Scheme (EDIS)