Is European financial integration stalling? - cuvânt de deschidere în cadrul seminarului EUROFI

Mugur Isărescu, guvernator BNR

Distinguished audience,
Ladies and gentlemen,

First and foremost, a very warm welcome to Romania, which, for the first time since joining the EU, holds the rotating Presidency of the EU Council. In particular, let me welcome you to Bucharest. Please allow me to thank Eurofi for organising this landmark event here, in Bucharest, as well as for giving me the opportunity to share with you today’s opening remarks – it is both a great privilege and a great personal satisfaction. This highly distinguished financial policy forum is a perfect occasion to exchange views and liaise with representatives of public authorities and of the financial industry across the European Union, as well as with participants from the non-financial corporate sector. We are very honoured to meet so many outstanding guests and attend discussions on a wide range of relevant topics.

These discussions aim to help us all sail on rough seas, a journey that can only be made through candid and thorough dialogue until we reach common ground and the best possible solutions. Knowing that our mission is to foster sustainable growth and safeguard financial stability, our interaction is meant to build bridges and shed new light on possible ways to handle the big challenges that lie ahead of us.

A great variety of topics – from Brexit and systemic challenges to the priorities of the upcoming European Commission – shall be tackled during this seminar, at a time when Europe needs a viable long-term common vision. I assume we all agree that healthy financial integration is a topical issue, critical to both the soundness of the financial system and the sustainability of economic growth in Europe. This is true because financial integration is an essential driver for enhancing competitiveness and allocating capital across Europe. Moreover, it fosters a smooth and balanced monetary policy transmission throughout the euro area, being key for underpinning the EU’s Single Market. Space for improvement certainly exists and countries, especially those with an emerging capital market, could significantly benefit from deeper financial integration in the EU.

If the appropriate level of banking sector integration is difficult to assess, what is indisputable, in my opinion, is that pre-crisis levels may not be proper benchmarks, for negative spillovers propagated at a fast pace. Having said this, a collective deposit insurance scheme and a much stronger Resolution Fund are a must for the Banking Union, paving the way for a sustainable financial integration. In addition, the introduction of instruments that can help Member States deal with asymmetric shocks is also needed to improve risk-sharing among them. Moreover, I cannot imagine a realistic scenario in which the institutional risk-sharing set-up required for strengthening the banking union and breaking up the sovereign-banks nexus comes into existence in the absence of a firm commitment to fiscal discipline.

In the aftermath of the crisis, fragmentation of EU banking markets along national borders has taken place. It was the consequence of risk mispricing during the boom: fragmentation has increased simply because market participants were not aware of or ignored that the institutional architecture of the Economic and Monetary Union was incomplete. The lacking institutional pieces could no longer be underplayed after the crisis. Completing the Economic and Monetary Union, which involves risk-sharing tools and risk-reduction efforts, is the way forward to address financial fragmentation.

As for its consequences, they concern mainly the transmission mechanism of the ECB’s monetary policy. Financial fragmentation hampers the functioning of the standard interest rate channel. While financial fragmentation has been mitigated as a result of broad-based non-standard policy measures taken by the ECB, there are limits to unorthodox policies and monetary policy will eventually need to be normalised. Having in place an institutional set-up that also relies on risk-sharing is a prerequisite for a well-functioning Economic and Monetary Union and an effective monetary policy.

A few years before the global crisis broke out, Andrew Crockett, former General Manager of the BIS, emphasised the important role of financial stability, distinct but complementary to price stability. The aftermath of the crisis has shown us that crisis management and resolution is also a public good, correlated with, but independent from, price and financial stability. The reforms of the regulation and supervision of the financial industry have taken us into the right direction, making our banks and the overall system safer. The European banking sector has reduced non-performing loans through balance sheet clean-up measures and is now better capitalised. But due heed should be paid to systemic risks in non-bank financial markets.

Fostering sustainable finance and using new technologies to improve the functioning and efficacy of the financial sector are currently important challenges to financial integration. Moreover, the challenge of Brexit, a major discussion topic at this seminar, may lead to a form of disconnect, with major disruptions, in a Europe striving for deeper integration. Of course, Brexit entails high uncertainty, shaking the grounds of planned investment, future trade and free movement of labour. It would also occur at a time of economic slowdown all over Europe, an erosion of multilateralism and broadening trade disputes. However, I am confident that we will be able to find the right way towards an EU financial and economic configuration that is compatible with a strong and resilient Europe.

Irrespective of when and how the odyssey of Brexit ends, the future will always look uncertain. What we can and must do is to try to be better prepared for it. An important part of this preparation is to discuss all the relevant issues related to the financial and economic integration in Europe and to assess carefully its challenges and prospects. We all have to stay open-minded and to keep close contact with the shifting economic reality in order to be able to articulate and implement effective policies.

Let me conclude by recalling the words of Jean Monnet, one of the founding fathers of the EU project, who thought that “Europe will be forged in crises, and will be the sum of the solutions adopted for those crises”.

I would like to wish every success to this High Level Seminar. I look forward to thought-provoking insights instrumental for finding wise solutions for our common future. Thank you for your attention and I hope that, at the end of the seminar, you will have plenty of reasons to consider these days well spent.

Hotel JW Marriott
București, 3 aprilie 2019