European Central Bank president Mario Draghi has called on European leaders to maintain momentum on “re-engineering European integration” by moving towards pooled economic sovereignty.
With “relative tranquillity” in the economic crisis, Mr Draghi told the World Economic Forum in Davos that euro countries needed to show they had learned the lessons of the crisis.
One important lesson, he said, is that countries can work together to claw back financial sovereignty lost in a crisis at national level.
“The natural path is to ask yourself what is the way we have to regain sovereignty of our destinies and economic futures,” he said.
Supranational sovereignty
One answer, he suggested, was to “create something where sovereignty is supranational and each member state in the euro area will share sovereignty with others”, exactly, he said, as was currently the case at ECB level.
He said work to build a European banking supervision, based at the ECB, was still at a “preparatory stage” but would have an entirely separate “soul” from monetary policy.
“You want to break the link between the banking system and their sovereigns, and the way to do this is with one single supervisor away from vested interest of single national political authorities,” he said.
The European regulator in planning would not have discrete responsibilities but would see a “combination of all supervisors acting together”. Even regulation of the bloc’s largest banks from Frankfurt would have an element of national input.Mr Draghi said he felt confident EU leaders finally understood there could be no sustainable economic growth through an endless creation of debt.
There was also political understanding, he said, that optimal fiscal policy was not a battle of austerity versus growth.
Instead it was about finding the right balance of elements – regularly adjusted – to allow consolidation programmes minimise the contractionary effects and maximise available growth.
Hesitation ‘doesn’t pay’
“Hesitation in undertaking fiscal consolidation doesn’t pay, it is very costly,” he said. “Front-loading is important to reap the benefits of increased credibility and lower interest rates on sovereign debts.”
The period after the immediate crisis, he said, was the time for governments to push cuts in current expenditure and lower taxes while pursuing normal capital expenditure.
Challenges remained on fragmented financial markets, Mr Draghi said, meaning the ECB would maintain its additional measures for the foreseeable future. European talks on a single resolution mechanism for euro-area banks, he said, was proof of an appetite for radical change to insulate the bloc against future shocks.
Opening the door to mutualised risk in the euro area was, he insisted, a long-term issue and “not monetary policy but a political decision”.
