European Central Bank Executive Board member Benoit Coeure urged European governments to push ahead with plans to strengthen monetary union to avoid stretching his institution’s mandate in the next crisis.
“Without further reforms, the next crisis may well force the ECB to test the limits of its mandate,” he said in a speech near Ljubljana, Slovenia, on Friday. “To assume that the current economic expansion will heal all wounds is naive. The euro area needs reform.”
With governments ill-prepared to handle the consequences of the region’s sovereign-debt crisis that erupted in 2009, the ECB found itself at the forefront in reining in financial panic. The government-bond purchase program that followed President Mario Draghi’s pledge to do “whatever it takes” to defend the single currency landed the central bank in some of Europe’s highest courts, and its unprecedented policy to revive the economy has drawn criticism in countries such as Germany.
Without reforms, “depending on the nature of the next crisis, policy action might require taking short-term rates much deeper into negative territory,” Coeure said. “Or it might require purchases of assets that are riskier than public or corporate debt. Or it may draw us dangerously close to monetary financing of governments.”
Coeure identified three lines of defence that would strengthen the 19-nation currency bloc.
Flexible financial markets are “indispensable” because they can absorb shocks efficiently without wasting “costly political capital.”
As even the most flexible markets can’t fully handle the fallout of financial crises, governments are needed to mitigate the economic consequences such as high unemployment. “We need to regain fiscal space, which means building adequate national fiscal buffers,” he said.
Finally, “the euro area needs a fiscal instrument that can help it cope with large shocks without having to rely excessively on the ECB,” he said, adding that the European Stability Mechanism — the euro area’s bailout fund — already is an important safeguard, but its competences should be enhanced.
“A stronger, more powerful ESM is not a goal in itself,” Klaus Regling, the institution’s managing director, said in a speech at the same event. “But it can be an element to make monetary union more robust and for Europe to take on more responsibility to solve our own problems.”
A new mandate should focus on helping a country regain market access under sustainable conditions, while another possible task could be to provide new facilities, such as a macroeconomic stabilization function, he said. The ESM could also play a role in a future debt restructuring.
Coeure acknowledged that strengthening the ESM will require time, but said that shouldn’t stop governments from making progress on the first two points an “urgent priority.”
“Achieving lasting economic stability must involve finding a balance of discipline and flexibility in our economies,” he said. “This will both strengthen support for the euro and help alleviate the pressure and burden on the ECB in crisis times.”