The financial crisis and its fallout for the ECB’s monetary policy conduct The sovereign debt crisis: towards fiscal union in Europe? Brussels, 7 June 2012 Frank Moss Director General (European Central Bank) * (* speaking in a personal capacity)

The unfolding of the crisis – 5 phases Spreads between 12-months Euribor/Libor and OIS swap rates; percentages per annum Spring 2010: 1st phase of the sovereign debt crisis Summer 2011: 2nd phase of the sovereign debt crisis Note: Spreads are the difference between 12-month Euribor/Libor and Overnight Index Swap rates in percentages per annum. Source: Bloomberg and ECB calculations Latest observation: 29 May 2012

Government bond spreads in selected euro area countries during the crisis (basis points) Note: 10 year government bond spread against the German bund. Source: Datastream and ECB calculations Latest observation: 1 June 2012

Consumer price inflation in the euro area during the crisis (annual percentage change) Source: Eurostat. Latest observations: May 2012 for HICP (Flash estimate) and April 2012 for HICP excluding food and energy.

ECB standard monetary policy during the crisis … (percentages per annum) Source: ECB Latest observation: 29 May 2012

… and non-standard monetary policy action Measure to improve bank funding and liquidity conditions Fixed-rate full allotment mode in all refinancing operations (since October 2008) Lengthening the maturity of the refinancing operations (1, 3, 6, 12 and 36 months) Extending the list of eligible collateral (and not fully relying on rating agencies) Extending liquidity directly in foreign currencies (USD and CHF) Reducing reserve requirements Measures to provide depth and liquidity in malfunctioning financial market segments A. Covered bond markets Covered Bond Purchase Programme 1 (CBPP1) EUR 60 bn purchased from July 2009-July 2010; CBPP 2 under way for EUR 40 bn (until November 2012) B. Sovereign bond markets Securities Markets Programme (launched in May 2010); EUR 212 bn outstanding 6

Comparing the action of central banks in advanced economies Evolution since 2007 (2007=100) In % of GDP

Financial sector repair Using the window of opportunity to break the vicious cycles operating in the crisis Financial sector repair Reduced loan supply Tighter financial conditions Credit losses Bailout costs Calls for fiscal tightening Growth repair Fiscal repair Lower tax receipt; higher expenditure

Action is being taken on the three legs, but time lines are different …. The financial (banking) sector repair agenda adequate provisioning for sovereign risk exposures (EBA), adequate capitalisation (Basel III), orderly deleveraging (national supervisors and ESRB), credible financial backstops The fiscal repair agenda reinforcing euro area fiscal frameworks (6-pack, 2-pack, Fiscal Compact, national frameworks), growth-friendly fiscal consolidation, credible euro area/international financial backstops The economic growth repair agenda growth-promoting structural reforms under the European Semester, Macroeconomic Imbalances Procedure

… and more needs to be done to break the vicious cycles The trend towards financial disintegration in the euro area has started If unchecked, it risks fundamentally tilting the balance of costs and benefits of Economic and Monetary Union To reverse the trend, the close link between national sovereigns and national banking systems needs to be weakened in order to build a genuine financial market union in the euro area A financial market union as part of a stronger economic union will enhance the effectiveness and benefits of monetary union

A euro area financial market union needs a banking union at its centre, requiring 4 essential components A harmonised supervisory rule book with unified supervisory practices for banks that are systemically important for the euro area A single supervisory authority with the power to impose recapitalisation on individual banks that are deemed systemically relevant for the euro area A unified deposit insurance system for all euro area depositors, financed by the banking system (with initial public sector contributions commensurate with the strength of national banking systems and deposit insurance schemes) A common bank resolution system, initially backed up by credit lines available to national governments through the ESM, but eventually financed by a common bank levy

… but a euro area banking union is only one part of a reinforced euro area economic union A euro area banking and financial market union can bring back the lost gains of financial integration and add to them But it needs to be part and parcel of a closer economic policy integration effort that will build a closer union The vision of which has to materialise soon, to convince both euro area citizens and financial markets Its first building blocks have to be in place soon to help arrest the spiralling vicious cycles

Thank you for your attention