IEP Lunch Debate with Sabine Lautenschläger, European Central Bank

The IEP Public Lunch Debate on the topic „Stability and growth in the Eurozone – who plays the main role?“ was conducted with Sabine Lauten­schläger, Member of Executive Board of the European Central Bank and Vice-Chair of the Super­visory Board of the ECB, at the Repre­sen­tation of the European Commission in Berlin on 30 June 2017. Richard Nikolaus Kühnel, Repre­sen­tative of the European Commission in Germany, gave a welcoming speech. The event was moderated by Prof. Dr. Mathias Jopp, Director of the Institüt für Europäische Politik (IEP).

Sabine Lauten­schläger traced the history of the Eurozone, and went into the role that the European Central Bank (ECB) has played since the financial and sovereign debt crisis. The role of the ECB, given its mandate, should be limited only to securing price stability, and, as such, to hold inflation to roughly two percent. Because of the weak economic climate and low inflation, the ECB is also compelled to follow a very lenient monetary policy, according to Lauten­schläger. This includes using uncon­ven­tional instru­ments such as bond purchases. While Lauten­schläger is indeed critical of some of these instru­ments, she never­theless considers the overall monetary policy course pursued to be essen­tially correct.

The present sustained economic recovery of the Eurozone allows for optimism, yet inflation has not yet returned to a stable trend. Once the goal of normalized price stability is achieved, monetary policy must then also return to its normal course. As such, we should prepare for a normalized monetary policy in the near future, and should appro­pri­ately react to such adjust­ments as they come.

The role of the ECB is indeed an important one; however, with regard to growth and welfare in the Eurozone, politics must play the decisive role. To this end Lauten­schläger invests respon­si­bility both in the parlia­ments and govern­ments of the 19 Eurozone countries and in the European insti­tu­tions in Brussels, as only through them can the necessary reforms be pushed through in a democ­ra­t­i­cally legit­imate manner.

The hetero­geneity of the European Union enriches this process in various regards, yet that hetero­geneity can also, due to the differing produc­tivity and resilience of the various Member State economies, become a problem. When one Eurozone country encounters an economic crisis, it becomes a concern and threat to all Eurozone countries. Thusly, the first step should be to prevent crises. To do this, Eurozone Member States must strengthen their produc­tivity and resilience. First and foremost, they must make their economies more sustainable and more compet­itive through struc­tural reforms. To this end, a more flexible labor market combined with a good education system, a functioning banking system and solid state finances that follow and carry out the regula­tions of the Stability and Growth Pact are necessary.

Yet where, despite such efforts, risks continue to be a threat, they must be reduced and efficiently shared. In the case of the most recent crisis, this should be carried out with respect to the public sector, and thus the taxpayers. Here Lauten­schläger advocated for a European finance minister with enforcement and veto powers vis-à-vis national budgets. This finance minister could make sure that the spending of European taxpayer contri­bu­tions confronts scrutiny and super­vision at the European level. This finance minister would also be an anchoring point for a deeper Economic Union.

It would be better, however, to spread risks across the market. To this end, market players must also be in the position to carry the risks of their invest­ments. With regards to banks, for example, it is important that state debt, which until now was essen­tially risk-free, and did not need to be supported with equity, is, in the future, supported with an amount of equity commen­surate to the amount of risk entailed. The appro­priate principle here is: the higher the risk, and the more debt a bank holds, the more equity it should also require. In following that principle, banks would have a larger cushion to offset possible losses.

If risks are more freely and volun­tarily shared across the market, then taxpayers will not need to carry as much of the burden in future crises. A European Capital Markets Union would offer the possi­bility to spread these risks over borders as well. Primarily, a Capital Markets Union would promote growth, since businesses would not be dependent for their financing on their respective domestic banks anymore, and savers would have more oppor­tu­nities for investment. To be sure, constructing a Capital Markets Union would be a fairly long-term under­taking, since capital markets are very complex and multi­faceted. Nonetheless, the realization of a Capital Markets Union, according to Lauten­schläger, is a project of the utmost impor­tance that, not least because of Brexit, has won increased signif­i­cance.

Europe is not only a story of risks, however; rather, it is also a source of chances, growth and welfare. The goal must ultimately be stability and welfare for all citizens of the Eurozone. To achieve that, only a united Europe can serve as a suitable foundation.

The full text of Sabine Lautenschläger’s speech is available on the website of the European Central Bank in German and English.

Author: Joshua Schlup­kothen


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