Chapter News, News

Vivian Reding: Towards a Federal Europe: What We Can Learn from Our Central Banks

Speech by Viviane Reding, Vice-President of the European Commission, EU Justice Commissioner
25th Anniversary of the OeNB-Brussels Representative Office/Brussels | 3 December 2013

Main Messages:

The way monetary policy works in the euro area today is really a model for how we should work together in our Union. The Maastricht Treaty left economic and fiscal policy at national level. We built a house without a solid foundation. And the crisis brutally exposed this fault. I urge Member States to adopt the Commission’s proposal for a Single Resolution Mechanism.

We have to make sure that democracy keeps up with reforms. Complexity is an enemy of democracy. Clarity and transparency, however, are friends of democracy. Whether it is about laying off civil servants, privatising state companies or raising the retirement age – questions like these need to be debated in the open, in the European Parliament. They must not be decided by unaccountable experts behind closed doors. In the field of economic and fiscal policy, we need a European Finance Minister who would have to be answerable to the Parliament.
Dear Ladies and Gentlemen,

I am very pleased and honoured to address you today and to be part of your celebrations. The 25 years since the opening of your representative office in Brussels have certainly been eventful. Most importantly, Europe was united during this time: the Iron Curtain came down, and our Union grew from twelve member states back in 1988 to 28 today.

Through your representation here, you at the Österreichische Nationalbank have been right at the centre of this process of change and growing integration. First, by helping to master the task of Austria’s accession to the EU and then of course by playing a key role in the introduction of the euro.

The financial and economic crisis we are starting to overcome has given a further big push to European integration. This is particularly true of economic and fiscal policy and with regard to the regulation of banks. I am going to explain to you why I think that the way monetary policy works in the euro area today is really a model for how we should work together in our Union. But I am also going to argue that, for much closer collaboration and joined responsibility to work, the EU will have to become a lot more democratic.

1. Driving integration in economic and fiscal matters

Since the outbreak of the crisis, integration in economic and fiscal policy has reached an unprecedented level. We are coordinating national measures much more strongly now. Just a few weeks ago for instance, the European Commission presented its analysis of euro countries’ draft budgetary plans and issued its recommendations to them – before national Parliaments had a chance to vote on these plans. This is a huge step forward that would have been unthinkable a few years ago.

At the same time, we are setting up a European system for the supervision and the resolution of banks. Again, this will take banking regulation to a whole new level of integration.

The reason why such momentous steps are possible now is simple: the crisis has shown very clearly that, economically, no country is an island. Decisions taken in one Member State have an impact on the others. That is why we always have to keep the bigger picture in mind. We also need to know well in advance what is going on in Member States so that we can spot problems early and prevent them from escalating as badly as they have in the past years.

In fact, what we are doing now is starting to fix the deficiencies that the Treaty of Maastricht had left us with. It established a common currency. But it left economic and fiscal policy at national level. We built a house without a solid foundation. And the crisis brutally exposed this fault.

We are now working to build that foundation. By coordinating the economic and fiscal policy that underpins our common currency much more strongly at European level. And by building a real federal shock absorber for our banking system. We have to break the vicious cycle between banks and sovereigns. This means that we have to get rid of the current system. A system in which mistakes made by bank managers can cripple the finances of whole countries and leave taxpayers picking up the bill.

The Single Supervisory Mechanism is in place, but we have to go further. We need a common system to deal with failing banks. I therefore urge Member States to overcome their selfish posturing and adopt the Commission’s proposal for a Single Resolution Mechanism. The Heads of State and Government have committed to reach agreement by the end of the year – governments now have to deliver.

2. The Eurosystem as a model

I think that as we look for ways of working together much more closely at European level, monetary policy offers interesting lessons. In this area, integration has progressed further than anywhere else. Here, we already have a federation. The European Central Bank has not replaced national central banks in this structure. Far from it. It works side by side with them. Together with national central banks like yours in Austria, the ECB forms the Eurosystem. Go on the website of your central bank for example, or that of the German Bundesbank or indeed the ECB’s webpage and you will see it: next to their name, there is the word ‘Eurosystem’.

The way the Euroystem works is a very typical European way of doing things. The national central banks are represented in the ECB and have a say in its decision making. At the same time, those national central banks do much more than simply following decisions taken at central level: they work jointly with the central level, interpreting monetary policy and carrying out other tasks, on the ground in their countries.

The Österreichische Nationalbank for example works to put decisions made in Frankfurt into action in Austria. And it watches over Austria’s banks and the stability of its financial system (together with the national Financial Market Authority) – a role that will of course be enhanced under the Single Supervisory Mechanism.

What is more, the different national central banks are free to develop their own areas of expertise. You all know that the Austrian central bank has a very special relationship with our euro notes: it was Robert Kalina, of the Österreichische Nationalbank, who designed them. And this central bank has made a name for itself with its excellent knowledge of central and Eastern Europe. Given the importance of these countries for Austria’s economy and financial stability, your experts at the central bank follow and analyse them very closely. This results in high-quality academic research which central bankers, regulators, investors, economists and politicians all over the euro area and beyond benefit from.

I think this kind of cooperation can serve as a model. We are already looking to create similar structures in other areas. Take an example from the policy field I am responsible for: the proposal for the creation of a European Public Prosecutor. To protect the EU budget against fraud, delegated European Prosecutors would carry out investigations and prosecutions in Member States, using national staff and applying national law. Their actions would be coordinated by the central European Public Prosecutor to ensure a uniform approach throughout the Union.

If we want to strengthen European integration, we must be ready for institutional innovation and creativity. Simplistic top-down approaches will have difficulty finding broad support among Member States. We will need to follow a more intelligent approach: institutional systems which blend the European perspective and the national practical experience into a new common framework that works efficiently for Europe’s citizens. This has been done successfully with the Eurosystem, and we are now trying to follow this example with the Single Supervisory Mechanism and the European Public Prosecutor’s Office.

3. The need for a Political Union

These steps towards closer integration in our Union are very encouraging, but they are only a start. We will need many more changes, bold changes. And we will have to make sure that democracy keeps up with reform.

Right now, the measures we have chosen to deepen integration too often put the Commission in a dilemma: we keep getting new tasks, yet often lack the power to carry them out effectively. For example, as I said, the Commission now analyses national draft budgetary plans. But we can only advise Member States, we have no way of enforcing our recommendations. We are expected to make sure that Member States stick to the new rules – while respecting national powers. This is an impossible task.

We can only resolve this by turning the Commission into a proper European government with real power. In the field of economic and fiscal policy, I think this power needs to be put into the hands of a European Finance Minister. That way, coordinated economic policy gets a face, someone who acts in the interest of all Member States and, for example, speaks for all of them at international meetings.

This kind of set-up will only work, however, if we give citizens democratic control over it. As more and more decisions that have a direct impact on the daily lives of citizens are taken at European level, decision-making processes and institutions have to become more democratic and transparent. Currently, many decisions are being made in a way that is not visible or understandable to citizens. And they are often being made by people and institutions which citizens cannot hold accountable.

This complexity is an enemy of democracy. Clarity and transparency, however, are friends of democracy. Whether it is about laying off civil servants, privatising state companies or raising the retirement age – questions like these need to be debated in the open, in the European Parliament. They must not be decided by unaccountable experts behind closed doors. And a European Finance Minister for example would have to be answerable to the Parliament.

To ensure this, we need a true Political Union. To me, this means a United States of Europe with the Commission as the government and two chambers – the European Parliament and a “Senate” of Member States.

This vision is of course but one of many for the future of Europe. Before we start to build new structures, we therefore need to have a broad debate with citizens on what kind of Europe they want. We will need to make clear to them that they have a real choice here, in next year’s European Parliament elections and beyond.

Thank you.