Next crisis could threaten eurozone cohesion: ECB official

AFP: The euro single currency area must shore itself up with reforms or face renewed threats of breakup when a new economic crisis strikes, a top European Central Bank official warned yesterday.

“Even a small downturn could create large economic and social costs. It could, once again, test the cohesiveness of the currency union,” ECB board member Benoit Coeure told a conference in Ljubljana, Slovenia.

Optimism has returned to the 19-nation single currency area in recent months, as the economy appears finally to be climbing out of the long gloom that followed the financial crisis.

GDP growth in 2017 surged to its fastest pace in a decade at 2.5 percent, statistics agency Eurostat said this week.

But “institutional failings that caused and perpetuated the crisis remain unresolved,” Coeure warned. “These are deep-rooted issues that cannot be resolved by a few years of above-trend growth.”

The French central banker outlined three ‘lines of defence’ that policymakers should fortify to brace the eurozone against future shocks.
Financial and service industry markets should be more closely integrated across Europe to better absorb potential blows without calling on taxpayer funds, he said, while incentives for national governments to reform their economies while the sun is shining must be rethought.
Secondly, governments must create ‘fiscal space’ -- reducing spending to build up a financial buffer for bad times -- while the European Stability Mechanism, cobbled together during the crisis to lend to stricken states, should have a broader mandate and be turned into a formal Brussels institution, Coeure continued.

Lastly, the euro area “needs a fiscal instrument that can help it cope with large shocks without having to rely excessively on the ECB,” he added.
President Emmanuel Macron of France has made creating a eurozone budget controlled by a common finance minister a key plank of his drive to reform the bloc. And conservative German Chancellor Angela Merkel has sounded cautiously open to such plans as coalition talks come to a head with the centre-left Social Democratic Party.

But there remain deep differences between Berlin, Paris, and other eurozone members about whether a shared budget is necessary or desirable and what it should be used for if created.

Coeure urged at least “visible progress on the first two” of his proposed lines of defence -- in part to spare the ECB from the risk of overstepping its legal bounds.

It has set interest rates at historic lows and bought almost 2.3 trillion euros of government and corporate bonds, fulfilling central bank president Mario Draghi’s 2012 promise to do “whatever it takes” to safeguard the single currency. “Although our actions were bold and unparallelled, we acted within our mandate,” Coeure said.

“Without further reforms, the next crisis may well force the ECB to test the limits of its mandate.”