Conference

Debt overhang, macroeconomic adjustment and EMU economic governance: challenges ahead for the euro area

The economic and financial crisis continues to have a strong impact on economic performance, which in turn impacts the readiness to integrate further in the euro area. Against this background, the European Central Bank organised a policy workshop on “Challenges Ahead for the Euro Area”, which took place on 20 November 2015. The three sessions of the workshop – chaired by Mr. Coeuré, Mr. Praet, and Mr. Constâncio, respectively – were devoted to (i) “Achieving a genuine Economic and Monetary Union”; (ii) “Public and private debt overhang”; and (iii) “Capital Markets Union”. Discussions also stood under the impression of recent events, which underlined the importance of cooperation in European policy making. The workshop was preceded by an academic conference focusing on debt overhang. Papers of this conference are published on the website.

Achieving a genuine Economic and Monetary Union

The Five Presidents’ Report was the main reference point for discussions in the panel on “Achieving a genuine Economic and Monetary Union”. Participants welcomed the report as a commitment to further integration. For some, rapid progress toward deeper integration seemed the only option to make EMU more sustainable, while others emphasised the need to be pragmatic and proceed with incremental improvements. Some also argued that progress towards risk sharing via fiscal policy must not reduce incentives for national governments to implement sound national policies. Participants highlighted the inter-dependence between deeper integration and other pressing challenges currently faced by the EU (economic recovery, refugee influx and security concerns). In particular, they agreed that more democratic legitimacy was a prerequisite for deeper integration and greater solidarity. Participants also broadly welcomed the progress made on banking union and argued that it provided a useful reference for how to achieve progress by linking various elements in a comprehensive policy agenda.

Public and private debt overhang

Discussions on “Public and private debt overhang” focused on the implications of the high public and private debt levels for economic governance. Discussants differed on the reasons behind the accumulation of high debt levels and the fragmentation of debt markets, but widely agreed that the relevance of vicious circles between banks and sovereign debt was one of the most important lessons from the euro area sovereign debt crisis. These vicious circles were also, but not uniquely, due to the fact that, during the crisis, debt markets had fragmented and banks held high amounts of their own countries’ sovereign debt securities. Against this background, some argued that limits should be imposed on the exposure of banks to individual sovereigns. In this respect, it was important that political capital would be invested to acknowledge the fiscal dimension of banking union and address its implications.

Capital Markets Union

Discussants of “Capital Markets Union” agreed that CMU could help unlock financing for SMEs and encourage private risk sharing, thereby better linking the financial system to the real economy and helping to break the link between banks and sovereigns. While some welcomed the Commission’s recent action plan and argued for the need to secure quick wins, others were more sceptical and pointed out that more ambition was needed and that institutional change had to be accompanied by a structural change in investment behaviour. Furthermore, discussants warned against trying to copy the U.S., pointing out that the importance of bank finance in Europe was linked to historically grown economic structures and that capital markets would not necessarily be superior in spreading risk. Therefore, CMU should be regarded as a complement to a well-functioning banking system, helping to prevent cross border capital flows from reversing in times of crises.

European Central Bank
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English

Participants are requested to arrange their own transfers from and to the airport, unless indicated otherwise.

David Sondermann
Directorate General Economics
+49 1525 3055 044
[email protected]

Demosthenes Ioannou
Directorate General International and European Relations
[email protected]

Annekatrin Bergmann
Directorate General Economics
+49 174 340 9797
[email protected]

Jutta Auth
Directorate General Communications - Outreach Division
+49 69 1344 7417
[email protected]