FRANKFURT (MNI) – The following is the second part of a verbatim
text of ECB Vice President Lucas Papademos’s opening statement to the
European Parliament’s committee on Economic and Monetary Affairs:

Let me now to turn to fiscal policies. Budgetary positions in the
euro area deteriorated significantly in 2009 as a result of the economic
contraction, fiscal policy stimulus and government support measures for
the financial sector. Eurostats latest estimates show that the average
general government deficit ratio in the euro area increased from 2.0% of
GDP in 2008 to 6.3% in 2009. Out of the 16 euro area countries, 13 are
already subject to an excessive deficit procedure. This year, all euro
area countries are projected to record deficits above 3% of GDP.
According to the updated stability and growth programmes, a discernible
improvement in fiscal positions is not foreseen in most countries until
2011 and 2012. The magnitude of the worsening of public finances is
underscored by the official estimate that the average debt-to-GDP ratio
is expected to reach 87% in 2012, compared with 66% in 2007 that is 21
percentage points higher than five years earlier. Thus, fiscal
imbalances are sizeable, broad-based and likely to persist for some time
to come.

The deterioration in the fiscal position has been especially acute
in a number of euro area countries, with Ireland, Greece and Spain
having recorded double-digit deficit ratios in 2009. The large revisions
to Greeces budget deficit for 2009 revealed a very serious fiscal
imbalance and triggered adverse financial market reactions. Following
the announcement of additional fiscal consolidation measures by the
Greek authorities in March 2010, the ECB welcomed these measures as
convincing steps towards achieving the ambitious but appropriate
budgetary objectives for 2010. All these measures should be implemented
in a timely and effective manner. Despite the commitment of the Greek
government to fully implement the announced measures for 2010 and the
statements by the euro area Heads of State and Government of 25 March
and by the Eurogroup of 11 April, financial market pressures persisted
and recently intensified. It is essential that the economic programme
currently being prepared by the European Commission, the ECB and the IMF
together with the Greek authorities specifies comprehensive fiscal
measures and structural reforms that will address the root causes of
Greeces fiscal imbalances and structural weaknesses, so as to ensure
the sustainability of its public finances and improve the countrys
international competitiveness.

More generally, there is concern that the persistence of sizeable
fiscal imbalances in Europe and elsewhere may undermine the publics
trust in the sustainability of public finances and entail risks to
economic growth and to financial stability. In the current
circumstances, the Stability and Growth Pact, which has been put in
place to safeguard sound and sustainable fiscal positions, is facing its
biggest challenge since its adoption in 1997. Therefore, it is now
imperative that all euro area countries strictly adhere to the Pacts
provisions. On the positive side, it is promising that, according to the
updated stability programmes, all euro area countries subject to an
excessive deficit procedure plan to correct their deficits in line with
the Councils deadlines. It is also encouraging that most of these
programmes focus on containing government expenditure, as the available
evidence demonstrates that this is the most effective way to achieve a
lasting reduction in fiscal imbalances.

Nevertheless, in several stability programmes, the fiscal
strategies presented are not underpinned by adequately specified
measures, in particular for the latter years of the projection horizon.
Moreover, in a number of cases, the stability programmes are based on
optimistic macroeconomic assumptions that put the correction of the
excessive deficits, according to the Councils deadline, at risk.

In this context, let me stress that the ECB welcomes the statement
by the European Council on 25 March, expressing its commitment to
strengthen and complement the existing institutional framework so as to
foster budgetary discipline and ensure fiscal sustainability. The
establishment of a task force, which will be chaired by the President of
the European Council, to make proposals to achieve this objective and to
explore all options to reinforce the legal framework, is an important
step forward. In particular, it is essential to improve the incentives
for national authorities to pursue policies, particularly in good times,
that support the sustainability of public finances, and to ensure that
economic surveillance results in effective policy actions that prevent
budgetary risks and address structural problems to promote the
competitiveness of the European economies. Towards a more resilient
financial system

Let me now conclude by addressing issues concerning financial
regulation and supervision. As regards the regulatory reform agenda
defined by the G20 leaders, significant and wide-ranging work has
already been carried out or is under way, but we should not be
complacent. It is crucial that the momentum for regulatory reform does
not wane. There is still much to do: First, it is essential that the
planned reforms effectively lead to a harmonised global regulatory
framework. Second, it is an urgent priority that the Basel Committee
proposals on capital requirements and liquidity standards are properly
calibrated and finalised by the end of 2010. Third, we need to ensure
that the regulatory framework effectively captures all systemically
important financial institutions, and that moral hazard problems related
to them are fully addressed.

In the European Union, the enhancements to the Capital Requirements
Directive should be swiftly adopted and an agreement on the Directive on
Alternative Investment Fund Managers be promptly reached. As regards the
establishment of the new EU financial supervisory framework, it is
important that the legislative process concerning the proposals made by
the Commission in September 2009, which are currently being discussed by
your Committee, is completed as expeditiously as possible and that all
relevant parties reach an agreement on the legal texts so that the
European Systemic Risk Board (ESRB) and the three new European
Supervisory Authorities (ESAs) are operational by 1 January 2011. We
should not risk losing momentum.

The ECB has made good progress with its preparations to ensure that
the ESRB will efficiently and effectively perform its tasks from the
moment of its inception. Let me assure you that the support to be
provided by the ECB and the ESCB to the ESRB and the future links
between them will not affect the ECBs objectives and the performance of
its tasks, which are clearly defined in the Treaty. The primary
objective of the ECB is to preserve price stability, and the conduct of
the single monetary policy is geared towards achieving this goal.
Moreover, the ECB and the NCBs are fully independent in carrying out the
tasks conferred upon them by the Treaty. Thus, there cannot be, and will
not be, any potential conflict between the conduct of the ECBs monetary
policy that aims to preserve price stability and the performance of its
tasks that contribute to the safeguarding of financial stability. The
ESRBs recommendations will not concern the definition and
implementation of the monetary policy of the ECB nor the monetary
policies of the EU central banks that are outside the euro area. At the
same time, macro-prudential supervision can facilitate the conduct of
monetary policy by helping to prevent systemic risks and mitigate their
effects, if they materialise.

Before concluding, let me stress that the timely and consistent
implementation of the regulatory and supervisory reforms, and, in
particular, the establishment of a new framework for macro-prudential
supervision, will greatly contribute to containing systemic risks and to
strengthening the resilience of the European financial system. For the
ECB, it is a privilege to have been entrusted with a very special role
in the performance of macro-prudential supervision in the EU. Although,
we have ahead of us a very challenging task to carry out, I am fully
confident that the ECB, in collaboration with the NCBs and the other
members of the ESRB, will successfully meet this challenge.

Madame Chair, honourable Members of the Committee, my presentation
today before your Committee is the last in my capacity as Vice-President
of the ECB. I should like to warmly thank you for our enriching and
constructive exchange of views. Over the past eight years, I have always
appreciated the cooperation and the fruitful dialogue with the Committee
on Economic and Monetary Affairs of the European Parliament.

Thank you for your attention. I am now at your disposal for

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