Claudia Buch: The future of the euro area - the perspective of central banks

Statement by Prof Claudia Buch, Vice-President of the Deutsche Bundesbank, and Ms Sylvie Goulard, Deputy Governor of the Bank of France, prepared for the policy panel on "The Future of the Euro Zone", as part of the joint conference "Monetary Policy Challenges" by the Bank of France and Deutsche Bundesbank, Paris, 21 June 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

It has been almost 20 years now since the euro has been introduced. The common European currency plays a vital role for the single market. The international division of labor is an important driver of growth and welfare. Globally, Europe is the largest economic area. A large share of Germany's and France's foreign trade goes to other European countries. Not only the real economies, but also financial markets and payment systems are closely intertwined across borders.

Many of these achievements are currently being debated - along with the responsibilities of the national and the supranational level in Europe. The reforms of the past ten years have remedied many shortcomings. However, the process of renewing European institutions is still ongoing.

At the same time, geopolitical risks have increased. Multilateral agreements and economic integration are being questioned openly. This comes, not least, with economic costs, and it might create incentives to take measures leading to a fragmentation of markets, including markets for capital and financial services.

To address these challenges, a common European response is needed. The key is a constructive and unprejudiced dialogue in Europe that aims at finding solutions. Given their analytical strength, central banks can contribute to such an informed dialogue and to reduce the influence of "fake news".

The Banque de France and the Deutsche Bundesbank cooperate in a number of ways within the Eurosystem. Therefore, we would like to take a joint perspective that comprises the following elements: the achievements of the reforms that have been implemented in the euro area should not be played down, we have to learn from past experiences, and we should enhance dialogue on the future of the euro area.

1. Not playing down achievements of reforms

Current discussions on open issues in Europe and potential risks might create the impression that progress since the recent crisis has been insufficient and that flaws in the institutional setting have not been identified. However, the opposite is true. Fundamental shortcomings of the financial system and institutional weaknesses in the currency union have been identified and addressed. Discussions on future steps to be taken should, therefore, start with a stock-take of what has been achieved so far in order to identify any need for further reforms.

The crisis has shown that the dynamics of debt and economic fundamentals need to be aligned. This holds true for the private and public sector sector. Also, no country and no financial system is immune to distortions and misaligned incentives. In economies as deeply integrated as the euro area, consequences of such misaligned incentives easily spill over across borders.

Important lessons have thus been drawn from the financial crisis.

With regard to fiscal policy, stricter rules on deficits and debt were established, including the "six-pack", the "two-pack", and the Fiscal Compact. The European Commission was put in charge of monitoring macroeconomic imbalances through which distortions spill over internationally.