FRANKFURT (MNI) – The improvement in financial market sentiment
since the summer may not last if policymakers ease off on their
commitments to reform, European Central Bank Executive Board member
Benoit Coeure warned Tuesday.

Speaking at a conference here, Coeure said he has seen improvement
“across all segments” of financial markets since July, but it is based
on a series of “assumptions” related to countries meeting their reform
commitments, the ECB’s readiness to engage in bond-buying, and further
steps towards integration at the European level.

“We should not be fooled by the current improvement in euro area
financial markets,” Coeure said.

“If there is a lack of commitment or lack of will to deliver on the
promises to strengthen the fundamentals, then the period of calm that we
are seeing in financial markets may not last,” he added.

For the ECB’s part, Coeure stressed that the central bank “will be
ready to step in, if and when” a country applies for an ECB bond-buying
program. To date no EMU member has applied for a program, which must
first go through the European Stability Mechanism.

Coeure said the fragmentation of financial markets in the Eurozone
remains a key concern for the ECB, warning that “as long as financial
markets are fragmented…you cannot claim you have a single currency in
Europe.”

Coeure also warned that Europe risked facing a situation like
Japan’s in the 1990s, with a “temptation to rely on the central bank to
provide liquidity” in the crisis. “Certainly we should avoid that,” he
said.

Coeure said he saw adjustments taking place in peripheral European
economies, citing improvements in current account positions and reduced
labor costs. While much of the initial improvement was cyclical, Coeure
said the countries are “gradually” moving from cyclical to structural
adjustments.

On banking union, Coeure said the ECB must avoid the trap of having
monetary policy dominated by financial stability concerns when the
central bank takes on the role of bank supervisor for the Eurozone. He
called for “largely separated decision-making structures” with only a
“limited role” for the ECB’s Governing Council in banking decisions.

“Monetary policy should not be dominated by banking supervision
concerns,” Coeure said, warning that there were “real risks that
monetary policy could become captured by financial stability
considerations.”

Coeure stressed that a single European supervisor must be combined
with a single bank resolution mechanism, though he acknowledged that
complications in creating a resolution mechanism meant it could be
implemented “a little later” than a common supervisor.

However, “You cannot have a long-lasting single supervisory
mechanism without a single resolution regime,” he said.

A resolution fund must be funded “primarily” by banks, Coeure said,
noting that the priority should be to limit the risk of bank resolution
costs falling on taxpayers. He also stressed that any mutualization of
risks – through European bodies assuming responsibility for the legacy
assets of national banks – should come “with the right incentives” to
avoid problems of moral hazard.

— Frankfurt bureau: +49 69 720 142; email: ccermak@mni-news.com

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