1. 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)

2. 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

3. 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

4. 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.

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

6. … 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

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

8. 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

9. 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

10. … 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

11. 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

12. … 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

13. Thank you for your attention