« Seizing the momentum for strengthening the economic and monetary union »

04.18.2018 7 min
A conference day organized by the EURO50 GROUP. I took part, the 10th of april in the round table « The missing pieces of the Banking Union »

Retrouvez ci-dessous le programme complet de ce rendez-vous, ainsi que la transcription de mon intervention.

Brussels, Monday 9 April (evening) and Tuesday 10 April (all day) 2018

The new political environment in continental Europe which emerged after Brexit, following the presidential election in France and thanks to the improved economic climate, has created a momentum for the European Union to implement reforms. The main concern is still the euro area which has to become more resilient, capable to resist to any external asymmetric shock and to stave off the existential threat which still hovers on the European currency.

Among the flurry of proposals, the European Commission recently set out a roadmap for deepening Europe’s Economic and Monetary Union. The subject is on the table of the European Council and a summit is to meet on June 28 and 29 during which decisions should be acted.

This Euro 50 Group meeting, a few weeks before the European Summit, which will take place in the premises of the European Parliament with the participation and contribution of policymakers is an excellent opportunity for the Euro 50 Group to contribute to the debate by looking at the main pieces which are lacking in the current EMU architecture and hence at the reforms (including those which have a political dimension) which are absolutely indispensable in the EU framework to make the euro area a fully-fledged and efficient currency area.

Monday 9th April 2018
Venue: BNP Paribas Fortis 20 Rue Royale, B-1000 Brussels


  • Welcome Dinner
  • Introduction: Alain Papiasse, Deputy Chief Operating Officer at BNP Paribas
  • Guest speaker: Poul Thomsen, Director of the European Department of the IMF
  • Comments by: Marco Buti, Director-General for Economic and Financial Affairs at the European Commission

Tuesday 10th April 2018
Venue: European Parliament – Room PHS3C050
60 rue Wiertz / Wiertzstraat 60
B-1047 Brussels

8:00 – 8:15 : Registration

8:15 – 8:35 :

  • Welcome Remarks
  • Edmond Alphandéry, Chairman of the Euro50 Group; Former Minister of
    Economy of France
  • Lucio Vinhas de Souza, Head of the Economics Team of the European Political
    Strategy Centre at the European Commission

8:35 – 8:55 : Exchange of views with Domenico Siniscalco, Managing Director and Vice Chairman of Morgan Stanley and Former Italian Minister of Finance on “The Italian political situation and its potential impact on the Eurozone

8:55 – 10:25 : Session I – A European Monetary Fund: For what purpose?

This session will deal with the missions that should be assigned to the proposed European Monetary Fund and therefore with its governance and its political accountability. It will look at the issues of common interest which are not yet in the realm of the ESM and which should be dealt by the proposed EMF.

President: Daniel Gros, Director of CEPS

8:55 – 9:10 : Guest speaker: Klaus Regling, Managing Director of the European Stability Mechanism

9:10 – 9:25 : Panellists (6 minutes each):

  • Laurence Boone, Group Chief Economist, Global Head of Multi Asset
    Client Solutions & Head of Research at AXA IM
  • Maria Demertzis, Deputy Director at Bruegel

9:25 – 10:25 : Roundtable discussion

10:25 – 10:35 : Coffee break

10:35 – 12:15 : Session II – The missing pieces of the Banking Union

This session will focus both on the technicalities and on the political and economic dimensions of the completion of the Banking Union and on the creation of a more resilient banking architecture.

President: Stefano Micossi, Director-General of Assonime; Honorary Professor of the College of Europe

10:35 – 10:50 : Guest speaker: Andrea Enria, Chairperson of the European Banking Authority

10:50 – 11:15 : Panellists (6 minutes each):

  • Dirk Cupei, Managing Director responsible for Financial Stability at the
    German Banking Association
  • Lars Feld, Member of the German Council of Economic Experts and
    President of the Walter Eucken Institute
  • Olivier Klein, CEO of BRED Bank; Professor of Financial Economics at
  • Gilles Noblet, Deputy Director General for International and European
    Relations at the ECB

11:15 – 12:15 :  Roundtable discussion

12:15 – 13:25 : Buffet lunch / Lunch session

12:55 – 13:15 : Guest speaker: Jyrki Katainen, Vice President of the European Commission for Jobs, Growth, Investment and Competitiveness

13:15 – 13:25 : Q&A

13:25 – 14:55 : Session III– The need for budget and fiscal integration?

This session will explore the degree of fiscal integration which may be necessary to strengthen the euro area and make it more resilient to external shocks, and also to facilitate convergence and hence prepare the non-euro area Members to join.

President: Niels Thygesen, Chair of the European Fiscal Board; Professor Emeritus of International Economics at the University of Copenhagen

13:25 – 13:40 : Guest speaker: Marcel Fratzscher, President of DIW Berlin for a presentation of the Franco-German economists’ proposal: “Reconciling risk sharing with market discipline: A constructive approach to euro area reform

13:40 – 13:55 : Panellists (6 minutes each):

  • Pervenche Berès, Member of the European Parliament
  • Otmar Issing, President of the Center for Financial Studies at the Goethe University of Frankfurt
  • Charles Wyplosz, Professor of International Economics at the Graduate Institute of International Studies in Geneva

13:55 – 14:55 : Roundtable discussion

14:55 – 15:05 : Coffee Break

15:05 – 16:50 : Session IV – Enhancing and strengthening financial integration

This session will deal with the issue of the mobilisation of private savings across EU Member States, the question of sovereign debt, including the issue of dealing with a default through sovereign debt restructuring mechanism, the creation of a risk-free asset.

President: Jakob von Weizsäcker, Member of the European Parliament

15:05 – 15:20 : Guest speaker: Erik Nielsen, Global Chief Economist at UniCredit, (on mobilising private saving through the euro area)

15:20 – 15:35 : Guest speaker: Lee Buchheit, Partner at Cleary Gottlieb, (on sovereign debt restructuring)

15:35 – 15:55 : Panellists (6 minutes each):

  • Elena Daly, Senior Counsel on Sovereign Debt and Emerging Market Matters at EM Conseil (on effective management of public debt in Europe)
  • Isabelle Mateos y Lago, Managing Director at BlackRock
  • Miranda Xafa, Senior Fellow at CIGI (on Capital Markets Union)

15:55 – 16:45 : Roundtable discussion

16:45 – 17:00 : Concluding wrap-u

Jacques de Larosière, Honorary Governor of Banque de France and Former Managing Director at the IMF


Transcript of Olivier Klein’s keynote

At the heart of the huge crisis of the Euro Zone, we experienced two negative feedback loops :

  • The first one : between the public deficit and the interest rate of the Public Debt ;
  • The second doom loop came about through the interaction between Bank Risk and Sovereign Risk. In fact, at this time, the only option of saving a bank was to bail it out through its own State’s intervention.

To break these two vicious circles, we had to rely :

  • First and foremost, on the ECB’s actions,
  • On the settlement of the European Stability Mechanism (ESM),
  • And, specifically for the second vicious circle, on the emerging concept of the European Banking Union (EBU).  It was also a mean to improve the sustainability of the EZ itself.

This EBU was conceived with 3 pillars in mind :

  • 1st Pillar : the Single Supervisory Mechanism,Of course, no cross-border solidarity without common discipline and common supervision of this discipline.
  • Which was, among other reasons, necessary to allow cross-border risk-sharing.
  • 2nd Pillar : the set up of the Single Resolution Mechanism to install a regulatory framework for orderly resolutions.
  • Notably in order not to leave banks with the only possibility of being bailed out by their own State.

Including :

  1. First priority : Private bail-in to avoid tax payers paying instead of creditors and investors who made wrong choices,
    and to combat moral hazard that was to be accompanied by additional banks’ Capital Buffers (TLAC and MREL).
  2. The creation of the Single Resolution Fund, to intervene if private bail-in solutions were not sufficient, and only if bail-in solutions had already taken place.
    This Fund represents the introduction of elements of solidarity within the Euro Zone banking sector.
  3. And finally, on top of this, the European Commission proposed possible support from the European Stability Mechanism, that is to say common funds, as a final backstop to complete construction.
  • 3rd Pillar : The European Deposit Insurance Scheme (EDIS).

The plan was to phase-in a cross-border unification scheme.
Under those conditions, the EBU would have been complete and efficient.

But today, even if every economist and most politicians agree that the process must go on, it is currently blocked. Because understandably some States and Banks, which are in good health, are afraid of rescuing national banking systems, which are in poorer health, fearing their legacy.

But is this good policy ?

In fact, over all, we have a unsatisfying Banking Union. At least as far as breaking the second vicious circle by risk-sharing is concerned.

  • First : The European Deposit Insurance Scheme stayed at the national level. There is up to now no cross-border risk-sharing while it was previously planned. 
  • Secondly : Till now, there has never been any effective intervention of the Single Resolution Fund. Even in the recent cases of the Spanish and Italian banks, Banco Popular in Spain and  Veneto Banca and Banca Popolare di Vicenza in Italy. In the latter case, because the private bail-in was declared by Italian Authorities as not applicable without a terrible effect on the Region’s economy. Which led to a national rescue solution.
    In one way or another, it appeared that only national solutions have taken place up to now.
  • Thirdly : We still do not precisely know, if a severe systemic risk occurred, if and how there would be any final backstop.

My concern is that instead of a clear and complete Banking Union, we had the “No bail-out” rule, often thought of as the only possible option, as a dogma :

  • With the good intention of combating moral hazard,
  • But also, to take into consideration a real lack of solidarity.

Unfortunately, even if the intention is commendable, the no bail-out rule as the only possible option might bring ever more risk. May we rely only on the bail-in rule if solidarity and final backstop are missing ?

I am afraid not. Why ?

  • First, the no bail-out rule could work for isolated bank risks, but not for systemic risk, 
  • Secondly, even in the case of an isolated risk, if the EBU remains incomplete, the private bail-in rule can lead to an increased risk of contagion on banks bonds and even on deposits.
  • Also because of the complexity and the variety of definitions of bail-inable debt.
  • Thirdly, is it always preferable to make the savers pay instead of the tax-payers ? Is it in any case less harmful economically ? And less painfull politically ? The savers are individuals or institutionals. But behind institutionals, there are again individuals as final investors.
  • On top of that, a huge loss due to bail-in proceedings could lead to a panic toward institutionals and raise systemic risk.
  • Fourth, the bail-in principle increases the cost of the banks funding, id est the cost of lending. 
  • Moreover, it obviously exacerbates the pro-cyclicity caracteristics of bank financing, as when things get worse, the banks funding costs more. And conversely.

So, under stress, the private bail-in rule as the only possible option can increase the fragility of the system, rather than reinforce its resilience.

Thus, an incomplete EBU might trigger State intervention on a national basis again. That is to say the infamous interaction between Bank Risk and Sovereign Risk would come back. While avoiding the negative feed-back loop was one of the main reasons for creating EBU.

Or even worse, if we are stuck in the no bail-out dogma, and by chance no national bail-out is put in place, it could lead to a major catastrophe.

The ECB unconventional interventions which have saved the Euro Zone and stabilized the banking system might not last forever.

In conclusion, my main points are :

  1. Clearly, fighting moral hazard is a fundamental necessity. But if we do not complete the Banking Union and we do not articulate clearly the different kinds of solutions, we could find ourselves in a bad position, mainly because of the contagion risk.
  2. To try to avoid moral hazard, we must obviously put in place rules and incentives ex ante. But, if despite these provisions, a big crisis occurs, being stuck in doctrine, with no bail-outs, the crisis might degenerate with disastrous consequences. Fighting moral hazard is right ex ante. It is not, when the big crisis is there.
  3. Of course, solidarity comes with common supervision and with the clearing of bad legacy, but only as much as possible. And if the willingness to achieve solidarity takes too long to be seen, the fear of an incomplete Euro Zone could come back to haunt us.