FRANKFURT (MNI) – The following is the second part of the speech
given by European Central Bank Executive Board member Lorenzo Bini
Smaghi at the ECON Committee of the European Parliament in Brussels on
Wednesday. The text was provided by the ECB and is available at

http://www.ecb.int/press/key/date/2010/html/sp100915.en.html:

“Any change in the institutional structure of the euro should start
by avoiding the same simplifying assumptions made in the past. Let me
mention three.

The first is to think that markets are always right and are able to
discipline countries and their debts. Markets were wrong in the past, in
under-pricing risk, are probably wrong at present in over-pricing it,
and will again be wrong in the future. Leaving to markets the task of
disciplining budgetary policies and inducing the Member States to take
corrective actions is an illusion that only economists can have. If we
really want to prevent and correct imbalances, in particular fiscal
imbalances, we need stronger institutional mechanisms, across the euro
area and within countries. This means more rules and automatic
sanctions.

The second mistake is to think that crises can be prevented
altogether. Crises have occurred in the past and might occur in the
future, also because of contagion. We have to be prepared for them and
be able to manage them efficiently.

The third mistake is to think that there are easy, or ‘orderly’
solutions to crises. Crises are messy, contagious and have unintended
consequences.

The ECB has developed concrete proposals to address the above
issues. They are now well known, so let me be concise and point to the
three main aspects, which relate to fiscal discipline, macroeconomic
surveillance and crisis management. Let me start with two general, but
important points.”

The first is that these proposals do not change the fundamental
nature of the euro area, in particular with respect to the basic
allocation of responsibilities in relation to budgetary policy, which
remains in the hands of the national authorities. There is no need to
have a single budgetary policy in the euro area. No need for a so-called
transfer union. However, national budgetary policies have to be
conducted in a framework which is consistent with a single currency. We
need a leap forward in the governance underlying the economic policies
conducted in the member states of the euro area. We should therefore
concentrate our efforts on strengthening discipline first and foremost
in euro area countries since they share the common currency, making use
of the provisions of the Treaty – notably Article 136 – which has been
inserted into the Treaty precisely because the member countries of
monetary union require enhanced economic governance. Whatever is decided
for the euro area could conceivably also apply to the rest of the Union,
but the discussion among all 27 Member States should not water down what
is necessary for the euro area. The second point is that the
institutional framework can be strengthened within the current Treaty,
exploiting to the extent possible secondary legislation. There is no
need for a Treaty change to achieve the large part of proposals which
are required and that we have put forward. There is also no time. As I
mentioned previously, the doubts raised by financial markets about the
ability of the system to become more resilient need to be answered
quickly. If these answers are linked to a long and uncertain
ratification process, doubts will spread again. Let me now turn to the
discussions which have taken place so far on the three main building
blocs of the reform.

On the subject of reinforced fiscal governance, a first step
forward was made on 7 September, when the ECOFIN Council endorsed the
new framework of the EU Semester as had been proposed by the Commission
in its Communication of 12 May. Better fiscal governance requires
changes both at the national and European level. At the national level,
the ECB supports the establishment of national fiscal frameworks that
set out minimum requirements for compliance with EU fiscal and
statistical rules and that in particular would promote more independence
in the national fiscal assessment, high-quality standards, a medium-term
orientation and an effective coverage of all general government
finances. At the EU level, the ECB favours a strengthening of the fiscal
framework around the five following measures:

i) more streamlined and hence more effective procedures in the
assessment of fiscal developments;

ii) reversal of the burden of proof, making it more difficult for
the Council to overturn in its decisions the assessment of the
Commission.

iii) more independence in the collection, verification and
assessment of the fiscal data and fiscal analysis at the level of the
Commission.

iv) more emphasis on public debt developments, as the Treaty
foresees.

v) quasi-automaticity of sanctions in case of breaches of the
rules, including the provision of both so-called procedural and
financial sanctions.

The Commission’s Communications of 12 May and 30 June does not go
far enough in the ECB’s view on two counts:

1. They thus far remain silent on how the independence of the
fiscal assessment and the independence and quality assessment of the
statistical data collection can be made more effective within the
Commission. In particular, we would like to see some of the procedures
currently in force in DG Competition at the level of the technical
assessment and the role of the Commissioner in the college also being
applied for DG ECFIN and its Commissioner. As regards statistics, the
new Council Regulation of July 2010 should be followed up with deeds; in
particular with more resources devoted to fiscal data and its
verification by Eurostat.”

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